-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QaCItc+pfM5/o/nDgfZJ20KcogVXFtCuH+stQYVm42qdaTHVOcPcKpGw4H4NwZVK FtdN8n6kBhN1fZQMW8GlPw== 0000898432-00-000171.txt : 20000218 0000898432-00-000171.hdr.sgml : 20000218 ACCESSION NUMBER: 0000898432-00-000171 CONFORMED SUBMISSION TYPE: N-14 8C PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20000217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANAGED HIGH YIELD PLUS FUND INC CENTRAL INDEX KEY: 0001060392 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14 8C SEC ACT: SEC FILE NUMBER: 333-30638 FILM NUMBER: 548639 BUSINESS ADDRESS: STREET 1: 1285 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 MAIL ADDRESS: STREET 1: 51 WEST 52ND ST STREET 2: 23RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 N-14 8C 1 As filed with the Securities and Exchange Commission on February 17, 2000 Registration No. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Pre-Effective Amendment No. ___ [ ] Post-Effective Amendment No. ___ MANAGED HIGH YIELD PLUS FUND INC. (Exact name of registrant as specified in charter) 51 West 52nd Street New York, New York 10019-6114 (Address of principal executive offices) Registrant's telephone number, including area code: (212) 713-2000 DIANNE E. O'DONNELL, ESQ. Vice President and Secretary 1285 Avenue of the Americas, 18th Floor New York, New York 10019 (Name and address of agent for service) COPIES TO: ROBERT A. WITTIE, ESQ. BENJAMIN J. HASKIN, ESQ. JENNIFER R. GONZALEZ, ESQ. Kirkpatrick & Lockhart LLP 1800 Massachusetts Avenue, N.W. Washington, D.C. 20036-1800 Approximate Date of Proposed Public Offering: As soon as practicable after this Registration Statement becomes effective. CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------- Proposed Maximum Proposed Maximum Title of Securities Amount Being Offering Price Per Aggregate Offering Amount of Being Registered Registered Unit(1) Price(1) Registration Fee - ------------------------------------------------------------------------------------------------------------------------ Common Stock ($.001 par 6,634,834 10.25 68,007,048.50 $17,953.86 value) - ------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f) under the Securities Act of 1933 based on the average high and low prices of Managed High Yield Fund Inc. reported in the consolidated reporting system on February 14, 2000. MANAGED HIGH YIELD PLUS FUND INC. CONTENTS OF REGISTRATION STATEMENT This Registration Statement contains the following papers and documents: o Cover Sheet o Contents of Registration Statement o Form N-14 Cross Reference Sheet o Letter to Stockholders o Notice of Special Meeting o Part A - Proxy Statement/Prospectus o Part B - Statement of Additional Information o Part C - Other Information o Signature Page o Exhibits MANAGED HIGH YIELD PLUS FUND INC. FORM N-14 CROSS REFERENCE SHEET
Part A Item No. and Caption Proxy Statement/Prospectus Caption - --------------------------- ---------------------------------- 1. Beginning of Registration Statement and Outside Cover Page Front Cover Page of Prospectus 2. Beginning and Outside Back Cover Page of Cover Page; Table of Contents Prospectus 3. Fee Table, Synopsis Information, Synopsis; Comparison of Principal Risk Factors; and Risk Factors Comparison of the Funds 4. Information about the Transaction Proposal: Reorganization of High Yield Fund into Plus Fund; Additional Information about the Reorganization; Capitalization 5. Information about the Registrant Comparison of Principal Risk Factors; Comparison of the Funds; Proposal: Reorganization of High Yield Fund into Plus Fund; Additional Information about the Reorganization; Capitalization; Additional Information About Both Funds; Additional Information About Plus Fund. See also Annual Report to Stockholders of Managed High Yield Plus Fund Inc. for the fiscal year ended May 31, 1999, previously filed on EDGAR, Accession Number 0001047469-99-029669 6. Information about the Company Being Acquired Comparison of Principal Risk Factors; Comparison of the Funds; Proposal: Reorganization of High Yield Fund into Plus Fund; Additional Information about the Reorganization; Capitalization; Additional Information About Both Funds. See also the Annual Report to Stockholders of Managed High Yield Fund Inc. for the fiscal year ended July 31, 1999, previously filed on EDGAR, Accession Number 0000930413-99-001250 MANAGED HIGH YIELD PLUS FUND INC. FORM N-14 CROSS REFERENCE SHEET 7. Voting Information Introduction 8. Interest of Certain Persons and Experts Not Applicable 9. Additional Information Required for Re-offering Not Applicable by Persons Deemed to be Underwriters Statement of Additional Information Part B Item No. and Caption Caption - --------------------------- ------- 10. Cover Page Cover Page 11. Table of Contents Table of Contents 12. Additional Information about the Registrant Additional Information About Plus Fund. See also Annual Report to Stockholders of Managed High Yield Plus Fund Inc. for the fiscal year ended May 31, 1999, previously filed on EDGAR, Accession Number 0001047469-99-029669. 13. Additional Information about the Company Not Applicable Being Acquired 14. Financial Statements PRO FORMA Financial Statements for the period ended January 31, 2000. See also Annual Report to Stockholders of Managed High Yield Plus Fund for the fiscal year ended May 31, 1999, previously filed on EDGAR, Accession Number 0001047469-99-029669; Annual Report to Stockholders of Managed High Yield Fund for the fiscal year ended July 31, 1999, previously filed on EDGAR, Accession Number 0000930413-99-001250.
Part C - ------ Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. MANAGED HIGH YIELD FUND INC. 51 West 52nd Street New York, New York 10019-6114 March __, 2000 Dear Stockholder: Enclosed is a combined proxy statement and prospectus that seeks your approval of an important proposal for your Fund. YOUR VOTE ON THIS PROPOSAL WILL HELP DECIDE THE FUND'S FUTURE. The Board of Directors of Managed High Yield Fund Inc. ("High Yield Fund") proposes that High Yield Fund reorganize ("merge") into Managed High Yield Plus Fund Inc. ("Plus Fund"). Under the proposed merger, each stockholder of High Yield Fund would become a holder of shares of common stock of Plus Fund and High Yield Fund would be liquidated. High Yield Fund and Plus Fund are closed-end investment companies listed on the New York Stock Exchange. The Funds have substantially similar investment objectives and invest primarily in the same markets. High Yield's investment objective is high current income while Plus Fund has a primary investment objective of high income with a secondary objective of capital appreciation. However, Plus Fund uses leverage to attempt to enhance yield and has the ability to invest to a greater extent in lower-rated securities. This has enabled Plus Fund to provide a higher yield than High Yield Fund. High Yield Fund's Board believes that combining the two Funds will benefit High Yield Fund's stockholders by providing them economies of scale, the potential to use leverage to enhance yield and greater investment flexibility. The proposed merger, the investment policies of the Funds and the use of leverage are described in more detail in the combined proxy statement/prospectus. AFTER CAREFUL CONSIDERATION, THE BOARD OF HIGH YIELD FUND HAS UNANIMOUSLY APPROVED THE PROPOSAL. THE BOARD RECOMMENDS THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY AND THEN VOTE "FOR" THE MERGER. The enclosed document describes the proposed merger and compares the two Funds' investment objectives, operating expenses and performance histories. Please read the document carefully. I appreciate that the length of the attached document may be daunting, but we have tried to make it as clear as possible while meeting all of the legal requirements. We have included a section of questions and answers that we think will interest most investors. After reviewing the document, please complete, date and sign your proxy card and return it in the enclosed postage-paid return envelope. YOUR VOTE IS VERY IMPORTANT. Please take a moment to review the enclosed materials and to date, sign and return your proxy card TODAY. Voting your shares early will permit High Yield Fund to avoid costly follow-up mail and telephone solicitation. We have retained an outside firm that specializes in proxy solicitation to assist us in connection with the proposed merger. If we have not received your vote as the meeting date approaches, you may receive a telephone call from Shareholder Communications Corporation to ask for your vote. We hope that their telephone call does not inconvenience you. As always, I thank you for being an investor in our funds. We are committed to serving your interests and appreciate your trust in us. Very truly yours, Margo N. Alexander President QUESTIONS & ANSWERS Q: WHY IS THIS MERGER BEING PROPOSED? A: High Yield Fund (PHT) stockholders would benefit from the opportunity to become stockholders of a Fund that has historically traded at a lower discount in the market and has provided higher income. High Yield Fund has traded at an average discount of -5.11% since its inception in November 1993 and has traded at an average discount of -5.70% since Plus Fund's (HYF) inception in June 1998. Plus Fund has had an average discount of -2.2% since its inception in June 1998. In addition, High Yield Fund has had an average NAV yield of 11.36% since June 1998 while Plus Fund's NAV yield has averaged 12.54% during the same period. The total returns based on NAV for High Yield Fund and Plus Fund during the period June 1998 through January 2000 were -3.85% and -3.37%, respectively. To summarize, Plus Fund has provided a higher NAV yield, has provided a better total return and has traded closer to its NAV than has High Yield Fund since Plus Fund's inception. In addition, both Funds and their stockholders would benefit from the economies of scale and opportunities for broader diversification that a larger asset base would provide. The chart below gives a history of the premium/discount of the two Funds since their respective inception dates. Since Plus Fund's inception it has consistently traded closer to its NAV than has High Yield Fund. Chart: High Yield Fund vs Plus Fund Premium/Discount Since Inception through January 31, 2000 Premium/Discount High Yield Plus Date Fund Fund Dec-93 -2.60 Jan-94 -3.80 Feb-94 -2.40 Mar-94 -8.80 Apr-94 -9.40 May-94 -7.70 Jun-94 -5.70 Jul-94 -10.10 Aug-94 -7.20 Sep-94 -13.80 Oct-94 -10.80 Nov-94 -6.50 Dec-94 -6.30 Jan-95 -3.80 Feb-95 -2.80 Mar-95 -6.80 Apr-95 -6.80 May-95 -4.10 Jun-95 -6.20 Jul-95 -7.00 Aug-95 -6.10 Sep-95 -7.40 Oct-95 -2.10 Nov-95 -3.20 Dec-95 -7.10 Jan-96 -4.90 Feb-96 -7.00 Mar-96 2.40 Apr-96 -7.10 May-96 -9.00 Jun-96 -6.20 Jul-96 -5.70 Aug-96 -4.40 Sep-96 -5.60 Oct-96 -3.30 Nov-96 -6.00 Dec-96 -5.70 Jan-97 -4.00 Feb-97 -2.30 Mar-97 -6.00 Apr-97 -1.10 May-97 -3.40 Jun-97 -1.60 Jul-97 -2.50 Aug-97 -1.80 Sep-97 -3.50 Oct-97 -2.00 Nov-97 -2.10 Dec-97 -0.10 Jan-98 -0.10 Feb-98 0.90 Mar-98 -5.30 Apr-98 -3.90 May-98 -4.80 Jun-98 -5.00 0.00 Jul-98 -5.30 -2.10 Aug-98 -10.60 -10.20 Sep-98 -5.20 0.50 Oct-98 3.40 6.20 Nov-98 -0.10 -0.80 Dec-98 -4.10 -2.80 Jan-99 -3.30 0.20 Feb-99 -2.10 -1.40 Mar-99 -1.70 -2.60 Apr-99 -7.10 -3.90 May-99 -5.40 -0.30 Jun-99 -5.60 0.10 Jul-99 -3.80 -0.70 Aug-99 -2.10 -1.70 Sep-99 -7.30 -2.10 2 Oct-99 -10.40 -1.90 Nov-99 -17.40 -8.40 Dec-99 -13.50 -8.90 Jan-00 -6.60 -3.00 This chart shows the Funds' historical 12-month NAV yields. This illustrates the higher income opportunities that have been provided to Plus Fund stockholders. Chart: High Yield Fund vs Plus Fund 12 Month Yield at NAV Since Inception through January 31, 2000 12 Month Yield at NAV Date High Yield Plus Fund Fund Nov-94 10.08 Dec-94 10.82 Jan-95 10.99 Feb-95 10.69 Mar-95 11.18 Apr-95 11.02 May-95 10.7 Jun-95 11.1 Jul-95 11.04 Aug-95 10.98 Sep-95 11.14 Oct-95 10.63 Nov-95 11.14 Dec-95 11.6 Jan-96 11.05 Feb-96 11.07 Mar-96 10.07 Apr-96 10.89 May-96 10.91 Jun-96 10.61 Jul-96 10.52 Aug-96 10.23 Sep-96 10.14 Oct-96 9.86 Nov-96 9.87 Dec-96 9.69 Jan-97 9.51 Feb-97 9.25 Mar-97 9.88 Apr-97 9.42 May-97 9.42 Jun-97 9.12 Jul-97 9.04 3 Aug-97 9.04 Sep-97 9 Oct-97 9.04 Nov-97 9.04 Dec-97 8.84 Jan-98 8.73 Feb-98 8.62 Mar-98 9.12 Apr-98 9.04 May-98 9.21 Jun-98 9.33 Jul-98 9.38 Aug-98 11.08 Sep-98 10.72 Oct-98 10.34 Nov-98 10.18 Dec-98 10.83 Jan-99 10.61 Feb-99 10.67 Mar-99 10.67 Apr-99 11.14 May-99 11.2 Jun-99 11.32 11.07 Jul-99 11.14 12.33 Aug-99 11.2 12.81 Sep-99 12 13.12 Oct-99 12.68 13.36 Nov-99 13.53 14.01 Dec-99 12.6 13.71 Jan-00 11.93 13.04 Q: HOW CAN PLUS FUND ENHANCE ITS YIELD WITH LEVERAGE? A: Plus Fund can enhance its yield through leverage because the Fund borrows money at interest rates that generally are lower than the yield it receives on its investments. For example, Plus Fund's average cost of borrowing for the 12 months ended January 31, 2000 was 5.69% and it had an average yield on its investments during that period of 11.98%. The Fund and its stockholders benefit from the incremental yield on the investments purchased with the proceeds of the borrowings. OF COURSE, THE USE OF LEVERAGE PRESENTS RISKS. IF THE FUND'S AVERAGE TOTAL RETURN (THAT IS, YIELD PLUS CAPITAL GAIN OR LOSS) ON THE INVESTMENTS PURCHASED WITH THE PROCEEDS OF THE BORROWINGS IS LESS THAN ITS AVERAGE COST OF BORROWINGS, THE FUND'S TOTAL RETURN, AS WELL AS THE AMOUNT AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS, WILL BE LOWER THAN IF LEVERAGE HAD NOT BEEN USED. 4 Q: HOW WILL THE MERGER AFFECT THE FUNDS' EXPENSES? A: The combined Fund will have a larger asset base than High Yield Fund, and as a result, its operating expenses (other than interest and related borrowing expenses) are expected to be a lower percentage of net assets than for High Yield Fund. Because the combined Fund will use leverage, it will incur interest expenses that High Yield Fund does not incur and, as a result, overall expenses will be higher. The use of leverage, however, has enabled Plus Fund to provide its stockholders with a yield higher than that provided by High Yield Fund. The following table shows pre-borrowing expenses for the 12 months ended January 31, 2000 for each Fund and on a PRO FORMA basis for the combined Fund, along with a comparison of net assets and net asset values. Fee and expense data is expressed as a percentage of net assets. For more details about fees and expenses, see Comparison of Funds - Fees and Expenses on page 18 of the combined proxy statement/prospectus. - -------------------------------------------------------------------------------- High Yield Fund Plus Fund Combined Fund Expenses Expenses Expenses - -------------------------------------------------------------------------------- Investment Advisory and Administration 0.90% 0.96%(1) 0.96%(1) Fees - -------------------------------------------------------------------------------- Other Expenses 0.33% 0.26% 0.25% - -------------------------------------------------------------------------------- Annual, Pre-Borrowing Operating Expenses 1.23% 1.22%(2) 1.21%(2) ================================================================================ Net Assets as of January 31, 2000 $68,227 $377,506 $445,733 (000's) - -------------------------------------------------------------------------------- Net Asset Value Per $11.31 $11.85 $11.85 Share - -------------------------------------------------------------------------------- (1) Reflects Plus Fund's outstanding borrowings of approximately 27% of its total assets (including the amount obtained through leverage) for the 12 months ended January 31, 2000 and assumes the combined Fund would have borrowed the same percentage of its total assets. Plus Fund pays and the combined Fund will pay investment advisory and administrative fees at an annual rate of 0.70% of the Fund's "managed assets" - that is, its total assets less only those liabilities that are not borrowings. Thus, the investment advisory and administrative fees increase in relation to the additional managed assets acquired through leverage. (2) After giving effect to borrowings of approximately 27% of total assets (including the amount obtained through leverage) at the same interest rate as that paid by Plus Fund during the 12 months ended January 31, 2000, total operating expenses for Plus Fund were 3.46% and, on a PRO FORMA basis, for the combined Fund would have been 3.45%. Q: HOW MANY SHARES WILL I RECEIVE IN THE MERGER? A: If the merger is approved and you participate in High Yield Fund's Dividend Reinvestment Plan, you will receive full and fractional shares of Plus Fund having an aggregate net asset value equal to the aggregate net asset value of the High Yield Fund shares you owned prior to the merger. If you do not participate in High Yield Fund's Dividend Reinvestment Plan, you will receive full shares of Plus Fund having a net asset value that (together with cash received in lieu of fractional shares) equals the aggregate net asset value of the High Yield Fund shares you owned prior to the merger. Net asset values will be calculated as of the closing date. Because the exchange of shares is based on the Funds' net asset values and not their market prices, you may receive Plus Fund shares with an aggregate market value on the date of the merger that is higher or lower than the market value of the High Yield Fund shares you previously held. The reason for this difference is that the market prices of the shares of the Funds in relation to their net asset values are likely to be different; I.E., they are likely to trade at different discounts or premiums. Q: WILL THE MERGER SUBJECT ME TO ANY TAXES? A: The Merger has been structured as a tax-free transaction, which means no gain or loss will be recognized by either Fund. In addition, you will recognize no 5 gain or loss as a result of your acquisition of Plus Fund shares through the Merger, except with respect to any cash received in lieu of a fractional share of Plus Fund. If you do not wish to receive Plus Fund shares in the merger, you are free to sell your High Yield Fund shares prior to the closing (expected to be on or about ___, 2000). Q: DO I NEED TO SURRENDER MY SHARE CERTIFICATES NOW? A: No. Please do not send in any share certificates at this time. High Yield Fund's transfer agent will mail you instructions and a letter of transmittal for use in surrendering your share certificate(s) for a certificate representing Plus Fund shares and, if applicable, cash. Q: WHAT IS MY BOARD'S RECOMMENDATION? A: Your Board of Directors recommends a vote "FOR" the merger. MANAGED HIGH YIELD FUND INC. 51 West 52nd Street New York, New York 10019-6114 ----------------------- NOTICE OF SPECIAL MEETING OF STOCKHOLDERS ----------------------- _____ __, 2000 ----------------------- To the Stockholders, NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders ("Meeting") of Managed High Yield Fund Inc. ("High Yield Fund") will be held on _________ ___, 2000, at 1285 Avenue of the Americas, 14th Floor, New York, New York, 10019, at [10:00] a.m., Eastern time, for the following purpose: To approve an Agreement and Plan of Reorganization and Termination ("Plan") that provides for the reorganization of High Yield Fund into Managed High Yield Plus Fund Inc. Stockholders of record as of the close of business on _______ __, 2000, are entitled to notice of, and to vote at, the Meeting and any adjournment thereof. Please execute and return promptly in the enclosed envelope the accompanying proxy, which is being solicited by the Board of Directors of High Yield Fund. Returning your proxy promptly is important to ensure a quorum at the Meeting. You may revoke your proxy at any time before it is exercised by the subsequent execution and submission of a revised proxy, by giving written notice of revocation to High Yield Fund at any time before the proxy is exercised or by voting in person at the Meeting. By Order of the Board of Directors, DIANNE E. O'DONNELL SECRETARY ________ ___, 2000 51 West 52nd Street New York, New York 10019-6114 - -------------------------------------------------------------------------------- YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN. Please indicate your voting instructions on the enclosed proxy card, sign and date the card and return it in the envelope provided. IF YOU SIGN, DATE AND RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED "FOR" THE PROPOSAL DESCRIBED ABOVE. In order to avoid the additional expense of further solicitation, we ask your cooperation in mailing your proxy card promptly. For more information or questions regarding casting your vote for the Meeting, please call 1-800-[949-8596.] If we do not receive your completed proxy cards after several weeks, you may be contacted by our proxy solicitor, Shareholder Communications Corporation. Our proxy solicitor will remind you to vote your shares. - -------------------------------------------------------------------------------- INSTRUCTIONS FOR SIGNING PROXY CARDS The following general rules for signing proxy cards may be of assistance to you and avoid the time and expense to the Fund involved in validating your vote if you fail to sign your proxy card properly. 1. Individual Accounts: Sign your name exactly as it appears in the registration on the proxy card. 2. Joint Accounts: Either party may sign, but the name of the party signing should conform exactly to the name shown in the registration on the proxy card. 3. All Other Accounts: The capacity of the individual signing the proxy card should be indicated unless it is reflected in the form of registration. For example: REGISTRATION VALID SIGNATURE ------------ --------------- Corporate Accounts (1) ABC Corp.............................. ABC Corp. John Doe, Treasurer (2) ABC Corp.............................. John Doe, Treasurer (3) ABC Corp. c/o John Doe, Treasurer..... John Doe (4) ABC Corp. Profit Sharing Plan......... John Doe, Trustee Partnership Accounts Jane B. Smith, Partner (1) The XYZ Partnership................... (2) Smith and Jones, Limited Partnership.. Jane B. Smith, General Partner Trust Accounts Jane B. Doe, Trustee (1) ABC Trust Account..................... (2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe Custodial or Estate Accounts (1) John B. Smith, Cust. f/b/o John B. Smith, Jr., UGMA/UTMA................. John B. Smith (2) Estate of John B. Smith............... John B. Smith, Jr., Executor MANAGED HIGH YIELD FUND INC. 51 WEST 52ND STREET NEW YORK, NEW YORK 10019-6114 1-800-647-1568 MANAGED HIGH YIELD PLUS FUND INC. 51 WEST 52ND STREET NEW YORK, NEW YORK 10019-6114 1-800-647-1568 COMBINED PROXY STATEMENT AND PROSPECTUS Dated: __________ ___, 2000 This document is being furnished in connection with a Special Meeting of Stockholders of Managed High Yield Fund Inc. ("High Yield Fund"), a Maryland corporation, to be held on __________ ___, 2000, at 1285 Avenue of the Americas, 14th Floor, New York, NY 10019 at [10:00] a.m., Eastern time (such meeting and any adjournments thereof are referred to as the "Meeting"). At the Meeting, the stockholders of High Yield Fund are being asked to consider and approve an Agreement and Plan of Reorganization and Termination ("Plan") that provides for the reorganization of High Yield Fund into Managed High Yield Plus Fund Inc. ("Plus Fund"), also a Maryland corporation ("Reorganization"). (High Yield Fund and Plus Fund are collectively referred to as "Funds.") A form of the Plan is attached as Appendix A to this Combined Proxy Statement and Prospectus ("Proxy Statement/Prospectus"). The Board of Directors of High Yield Fund ("Board") has unanimously approved the Plan as being in the best interests of High Yield Fund and its stockholders. Pursuant to the Plan, High Yield Fund will transfer all its assets to Plus Fund, which will assume all the liabilities of High Yield Fund. Each High Yield Fund stockholder will receive the number of full shares of Plus Fund common stock ("Plus Fund Shares"), plus fractional shares for High Yield Fund stockholders that participate in High Yield Fund's Dividend Reinvestment Plan and cash in lieu of any fractional shares for all other High Yield Fund stockholders, having an aggregate net asset value ("NAV") that, on the effective date of the Reorganization, is equal to the aggregate NAV of the stockholder's shares of common stock of High Yield Fund. High Yield Fund stockholders will recognize no gain or loss, except with respect to any cash received in lieu of fractional Plus Fund Shares. The NAV of each High Yield Fund stockholder's account with Plus Fund immediately after the Reorganization, including any cash received in lieu of a fractional Plus Fund Share, will be the same as the NAV of such stockholder's High Yield Fund shares immediately prior to the Reorganization. The market price of the shares of either Fund may be higher or lower than their respective NAVs. While the total NAV of shares owned by each stockholder after the Reorganization will be the same, the market value of the Plus Fund Shares that a High Yield Fund stockholder receives in the Reorganization may be more or less than the market value of the High Yield Fund shares that such stockholder owns immediately before the Reorganization. The Funds are diversified, closed-end management investment companies with substantially similar investment objectives. Plus Fund's investment objective is to seek high income and, secondarily, capital appreciation. High Yield Fund's investment objective is to seek high current income. Both Funds seek to achieve their investment objectives by investing primarily in a diversified portfolio of lower-rated, income-producing debt and related equity securities. Both Funds may invest in foreign issuers, including foreign issuers in emerging market countries. This Proxy Statement/Prospectus sets forth the information that a stockholder of High Yield Fund should know before voting on the Plan. It should be read carefully and retained for future reference. A Statement of Additional Information ("SAI") dated __________ ___, 2000 containing additional information about Plus Fund has been filed with the Securities and Exchange Commission ("SEC") and is hereby incorporated by reference in its entirety into this Proxy Statement/Prospectus. The Annual Report to Stockholders of Plus Fund for the fiscal year ended May 31, 1999, and the Semi-Annual Report to Stockholders of Plus Fund for the six months ended November 30, 1999, are on file with the SEC and are incorporated by reference into this Proxy Statement/Prospectus. The Annual Report to Stockholders of High Yield Fund for the fiscal year ended July 31, 1999, and the Semi-Annual Report to Stockholders of High Yield Fund for the six months ended January 31, 1999, are on file with the SEC and are incorporated by reference into this Proxy Statement/Prospectus. These documents are available without charge by writing to Mitchell Hutchins Asset Management Inc., 51 West 52nd Street, New York, NY 10019-6114, or by calling 1-800-647-1568. The SEC maintains a Web site at http://www.sec.gov that contains the documents described above and other information about High Yield Fund and Plus Fund. Additional information about both Funds may also be obtained on the Web at http://www.painewebber.com. The shares of High Yield Fund and Plus Fund are listed and publicly traded on the New York Stock Exchange ("NYSE"). Reports, proxy statements and other information concerning the Funds may be inspected at the offices of the NYSE. AS WITH ALL INVESTMENT COMPANIES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. TO STATE OTHERWISE IS A CRIME. TABLE OF CONTENTS Section Title Page INTRODUCTION..................................................................1 SYNOPSIS......................................................................2 COMPARISON OF PRINCIPAL RISK FACTORS..........................................5 Primary Differences in Investment Risks of the Funds.....................5 Leverage.................................................................5 Credit Quality of Securities.............................................7 Risks Common to Both Funds...............................................8 Market Price and Net Asset Value of Shares...........................8 Lower-Rated Debt Securities..........................................8 Investing in Foreign Securities.....................................10 Original Issue Discount, Zero Coupon and Payment-in-Kind Securities..........................................................11 Call Features.......................................................11 Premium Securities..................................................11 Hedging and Other Strategies Using Derivative Instruments...........11 PROPOSAL: REORGANIZATION OF HIGH YIELD FUND INTO PLUS FUND..................12 Information about the Reorganization....................................12 Board Considerations....................................................12 The Plan................................................................15 COMPARISON OF THE FUNDS......................................................16 Forms of Organization...............................................16 Investment Objectives...............................................16 Investment Policies.................................................16 Investment Limitations..............................................17 Leverage............................................................18 Portfolio Compatibility.............................................18 Fees and Expenses...................................................18 Expense Example.....................................................19 Sales Charges.......................................................19 Trading History- Share Price Data...................................19 Dividends and Other Distributions...................................20 Dividend Reinvestment Plan..........................................21 Management of the Funds.............................................23 Other Service Providers.............................................25 FINANCIAL HIGHLIGHTS.........................................................25 ADDITIONAL INFORMATION ABOUT THE REORGANIZATION..............................27 TERMS OF THE REORGANIZATION.............................................27 DESCRIPTION OF SECURITIES TO BE ISSUED..................................29 DIVIDENDS AND OTHER DISTRIBUTIONS.......................................29 SURRENDER AND EXCHANGE OF HIGH YIELD FUND STOCK CERTIFICATES............29 ACCOUNTING TREATMENT....................................................30 FEDERAL INCOME TAX CONSIDERATIONS.......................................30 CAPITALIZATION...............................................................31 LEGAL MATTERS................................................................31 INFORMATION FILED WITH THE SEC AND NYSE......................................31 INFORMATION ABOUT THE FUNDS' ADVISER AND ADMINISTRATOR.......................32 EXPERTS......................................................................32 STOCKHOLDER PROPOSALS........................................................32 ADDITIONAL INFORMATION ABOUT BOTH FUNDS......................................33 Portfolio Securities....................................................33 Other Investment Practices..............................................35 Temporary and Defensive Strategies and Borrowings.......................38 Certain Anti-Takeover Provisions of the Articles of Incorporation.......38 Description of Capital Stock............................................39 Taxation................................................................42 APPENDIX A: Form of Agreement and Plan of Reorganization and Termination....A-1 APPENDIX B: Directors and Officers of High Yield Fund and Plus Fund ........B-1 APPENDIX C: Form of Proxy...................................................C-1 INTRODUCTION This Proxy Statement/Prospectus is being furnished to stockholders of High Yield Fund in connection with the solicitation of proxies by the Board for use at the Meeting. All properly executed and unrevoked proxies received in time for the Meeting will be voted in accordance with the instructions contained therein. If no instructions are given, shares represented by proxies will be voted "FOR" approval of the Plan. The presence in person or by proxy of High Yield Fund stockholders entitled to cast a majority of all the votes entitled to be cast at the Meeting will constitute a quorum. If a quorum is not present at the Meeting or a quorum is present but sufficient votes to approve the proposal described in this Proxy Statement/Prospectus are not received, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies. Any such adjournment will require the affirmative vote of a majority of the shares represented at the Meeting in person or by proxy. The persons named as proxies will vote those proxies that they are entitled to vote "FOR" the proposal in favor of such an adjournment and will vote those proxies required to be voted "AGAINST" the proposal against such adjournment. High Yield Fund intends to mail this Proxy Statement/Prospectus and the accompanying proxy card on or about __________ ___, 2000. Approval of the Plan requires the affirmative vote of a majority of the votes entitled to be cast on the proposal. Broker non-votes are shares held in "street name" for which the broker indicates that instructions have not been received from the beneficial owners or other persons entitled to vote and for which the broker does not have discretionary voting authority. Abstentions and broker non-votes will be counted as shares present at the Meeting for quorum purposes but will not be considered votes cast at the Meeting. Abstentions and broker non-votes are effectively votes against the Plan because the required affirmative vote is a majority of the total shares outstanding. Any person giving a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a written notice of revocation to the Secretary of High Yield Fund ("Secretary"). To be effective, such revocation must be received by the Secretary prior to the Meeting and must indicate the stockholder's name and account number. In addition, although mere attendance at the Meeting will not revoke a proxy, a stockholder present at the Meeting may withdraw his or her proxy by voting in person. Stockholders of record as of the close of business on __________ ___,2000 ("Record Date"), are entitled to vote at the Meeting. On the Record Date, there were _________ shares of High Yield Fund outstanding. Each stockholder is entitled to one vote for each full share held and a fractional vote for each fractional share held. [As of ________, 2000, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), the investment adviser of both High Yield Fund and Plus Fund, did not know of any person who owned beneficially 5% or more of either Fund's shares.] High Yield Fund has engaged the services of Shareholder Communications Corporation ("SCC") to assist it in the solicitation of proxies for the Meeting. High Yield Fund expects to solicit proxies principally by mail, but it or SCC may also solicit proxies by telephone, facsimile, e-mail or personal interview. High Yield Fund officers and employees of Mitchell Hutchins who assist in the proxy solicitation will not receive any additional or special compensation for any such efforts. High Yield Fund and Plus Fund will bear the expenses incurred in connection with the Reorganization, which are estimated to be $245,000. SCC will be paid approximately $35,000 for proxy solicitation services. High Yield Fund will request broker/dealer firms, custodians, nominees and fiduciaries to forward proxy materials to the beneficial owners of the shares held of record by such persons. High Yield Fund may reimburse such broker/dealer firms, custodians, nominees and fiduciaries for their reasonable expenses incurred in connection with such proxy solicitation. SYNOPSIS The following is a summary of certain information relating to the proposed reorganization, and is qualified by reference to the more complete information contained elsewhere in the Proxy Statement/Prospectus and the Appendices attached hereto. SPECIAL MEETING. This Proxy Statement/Prospectus is being furnished to stockholders of High Yield Fund in connection with the solicitation of proxies by the Board for use at the Meeting to be held __________ ___, 2000 at [10:00] a.m., Eastern time, and any adjournments thereof. At the Meeting, stockholders will be asked to consider and approve an Agreement and Plan of Reorganization and Termination ("Plan") that provides for the reorganization of High Yield Fund into Plus Fund, as described below. Only stockholders of record as of the close of business on the Record Date, are entitled to vote at the Meeting. Each stockholder is entitled to one vote for each full share held and a fractional vote for each fractional share held. All properly executed and unrevoked proxies received in time for the Meeting will be voted in accordance with the instructions contained therein. If no instructions are given, shares represented by proxies will be voted "FOR" approval of the Plan. Any person giving a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a written notice of revocation to the Secretary of High Yield Fund. PROPOSED REORGANIZATION. The Board proposes that High Yield Fund reorganize into Plus Fund and that High Yield Fund's stockholders become stockholders of Plus Fund. The shares of outstanding common stock of High Yield Fund will be converted into an equivalent dollar amount of full shares of common stock of Plus Fund ("Plus Fund Shares"), plus fractional shares for High Yield Fund stockholders that participate in High Yield Fund's Dividend Reinvestment Plan and cash in lieu of any fractional shares for all other High Yield Fund stockholders computed based on the net asset value ("NAV") per share of each Fund on the closing date ("Closing Date"). An exchange of High Yield Fund shares for Plus Fund Shares at NAV may result in High Yield Fund stockholders receiving Plus Fund Shares with an aggregate market value on the date of the exchange that is higher or lower than the market value of their shares. The reason for this difference is that the market prices of the shares of the Funds in relation to their NAVs are likely to be different; I.E., the Funds' shares are likely to trade at different discounts or premiums. No sales charge or fee of any kind will be charged to High Yield Fund stockholders in connection with their receipt of Plus Fund Shares in the Reorganization. Neither Fund will recognize any gain or loss for federal income tax purposes due to the Reorganization. In addition, each High Yield Fund stockholder will recognize no gain or loss, except with respect to any cash received in lieu of a fractional share, if any. The Reorganization is subject to a number of conditions, including stockholder approval and satisfaction of the terms of the Plan. The Plan may be terminated and the Reorganization abandoned, whether before or after approval by 2 the Fund's stockholders, at any time prior to the Closing Date (i) by the mutual consent of the Board of Directors of each Fund; (ii) by either Fund (a) if the other Fund materially breaches any representation, warranty, or covenant contained in the Plan; (b) if the conditions to that Fund's obligations under the Plan have not been satisfied or waived; or (c) if that Fund's Board, in its sole discretion, determines that proceeding with the Reorganization would not be in the best interests of its stockholders. If the Reorganization has not been consummated by _______, 2000, the Plan will automatically terminate, unless a later date is mutually agreed upon by the Board of Directors of each Fund. THE PLAN. Pursuant to the Plan, High Yield Fund will transfer all its assets to Plus Fund, which will assume all the liabilities of High Yield Fund, and each High Yield Fund stockholder will receive the number of full Plus Fund Shares and either cash or a fractional Plus Fund Share, as appropriate, having an aggregate NAV that, on the effective date of the Reorganization, is equal to the aggregate NAV of the stockholder's shares of common stock of High Yield Fund. Immediately after the Reorganization, the NAV of each High Yield Fund stockholder's account with Plus Fund, including any cash received in lieu of a fractional Plus Fund Share, will be the same as the NAV of such stockholder's High Yield Fund shares immediately prior to the Reorganization. High Yield Fund stockholders will recognize no gain or loss in connection with the Reorganization, except with respect to any cash received in lieu of fractional Plus Fund Shares. BOARD CONSIDERATIONS RELATING TO THE REORGANIZATION. At their November 11, 1999 and December 17, 1999 meetings, the Boards considered Mitchell Hutchins' assessments of High Yield Fund and Plus Fund and considered the potential benefits to each Fund if High Yield Fund were to be reorganized into Plus Fund. Mitchell Hutchins advised that both Funds' stockholders would benefit from the economies of scale (I.E., lower operating expense ratios) and opportunities for broader diversification that a larger asset base would provide. In addition, Mitchell Hutchins advised that High Yield Fund's stockholders could benefit from the potential to use leverage to enhance return and from Plus Fund's more flexible investment parameters. Further, the Reorganization itself could enhance the ability of securities analysts to follow Plus Fund because it will eliminate any confusion in the marketplace that results from two funds with substantially similar names, investment objectives and policies, being managed by the same investment adviser. As part of its consideration, High Yield Fund's Board examined a number of factors with respect to the Reorganization, including: (1) the compatibility of the Funds' investment objectives, policies and restrictions; (2) the Funds' respective investment performances; (3) the effect of the Reorganization on the expense ratio of Plus Fund and that expense ratio relative to High Yield Fund's current expense ratio; (4) the costs to be incurred by each Fund as a result of the Reorganization; (5) the tax consequences of the Reorganization; (6) Mitchell Hutchins' assessment of the likely impact on High Yield Fund's stockholders of the receipt of Plus Fund Shares at NAV; and (7) the continuity of portfolio management. The Board also considered the potential benefits of the Reorganization to other persons, including Mitchell Hutchins and its affiliates. COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS. The investment objectives of High Yield Fund and Plus Fund are substantially similar. High Yield Fund's investment objective is high current income. The primary investment objective of Plus Fund is high income, while its secondary objective is capital appreciation. Both Funds seek to achieve their investment objectives by investing primarily in a diversified portfolio of lower-rated, income-producing debt and related equity securities. Both Funds may invest in foreign issuers, including foreign issuers in emerging market countries. Each Fund may also engage in 3 hedging strategies, such as options, futures and forward currency contracts, to attempt to reduce the overall risk of its investment portfolio, enhance income, realize gains or manage the Fund's foreign currency exposure. The primary differences in the Funds' investment policies are Plus Fund's use of leverage and its greater flexibility in choosing the credit quality of its portfolio. Plus Fund can borrow up to 33 1/3% of its total assets (including the amount obtained through leverage) for investment purposes. It also may borrow an additional 5% of its total assets (not including the amount so borrowed) for temporary or emergency purposes. As of January 31, 2000, Plus Fund's borrowings represented about 28% of total assets. High Yield Fund can borrow only for temporary or emergency purposes, and those borrowings are limited to 10% of its total assets (not including the amount borrowed). Historically, High Yield Fund generally has not borrowed, and it had no borrowings outstanding as of January 31, 2000. High Yield Fund's investment policies require that it normally invest at least 80% of its total assets in securities that are rated BB or B by S&P or comparably rated by another Rating Agency. Only up to 20% of its total assets may be invested in securities that are rated either above or below those levels or that are unrated. Plus Fund's investment policies require that it normally invest at least 65% of its total assets in securities that are rated at or below the BB level, or equivalent unrated securities. Unlike High Yield Fund, however, Plus Fund is not limited in the percentage of its assets that are rated below B except that only 15% of its assets may be invested in securities that are rated as low as D (which normally are in default at the time of purchase), and it can invest up to 35% of its assets in securities that are rated above BB (that is, securities that are "investment grade"). Although the differences in the two Funds' investment policies give Plus Fund greater flexibility to adjust the credit quality of its portfolio, the credit quality of the securities actually held by Plus Fund historically has been within the range permitted under High Yield Fund's policies. Moreover, Plus Fund's current ability to invest in the lowest quality securities (CCC and lower) is somewhat limited by conditions imposed under its outstanding leverage facility. (SEE Comparison of Principal Risk Factors--Primary Differences in Investment Risks of the Funds.) COMPARISON OF PRINCIPAL RISK FACTORS. Both High Yield Fund and Plus Fund are subject to the risks of investing in U.S. and foreign bond markets. Plus Fund, however, is also subject to additional risks due to its use of leverage and due to its ability to invest without limit in securities that are rated lower than B or the equivalent. LEVERAGE. Leverage creates risks for stockholders, including the likelihood of greater volatility in the NAV and market price of shares of Plus Fund and the risk that fluctuations in interest rates on indebtedness may adversely affect the return to stockholders. Plus Fund uses leverage; High Yield Fund does not. Plus Fund has obtained a secured line of credit pursuant to which it may borrow up to $200,000,000 for the purpose of making additional investments. During the twelve months ended January 31, 2000, the Fund has maintained outstanding borrowings under the line of credit in amounts ranging between approximately $___________ and $___________. These borrowings have represented between __% and __% of Plus Fund's total assets. Following the Reorganization, Plus Fund anticipates increasing its borrowings so as to maintain its leverage within a range of between 26% and 31% of its increased total assets. The terms of Plus Fund's line of credit require that it maintain collateral, segregated with the Fund's custodian and pledged to secure the Fund's obligations under the line of credit, having a value that at all times is equal to at least 250% of Plus Fund's outstanding borrowings under the line of credit and to maintain eligible assets having a value equal to at least 300% of outstanding borrowings. The required collateral (as well as the assets used to satisfy the 300% asset coverage requirement) must be comprised of Fund portfolio assets that satisfy certain eligibility requirements. Subject to certain conditions, the Fund is able to substitute eligible collateral as necessary in order to effect portfolio transactions, and Mitchell Hutchins does not believe that Plus Fund's obligation to maintain collateral will impede the Fund's ability to manage its assets in accordance with its investment objectives. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of 4 leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the income and capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return to the Fund will be less than if leverage had not been used, and, therefore, the amount available for distribution to stockholders as dividends and other distributions will be reduced. Even in the latter case, however, Mitchell Hutchins may decide to maintain Plus Fund's leveraged position if it deems such action to be appropriate under the circumstances. CREDIT QUALITY. Plus Fund may invest its entire portfolio in securities rated lower than B or the equivalent while High Yield Fund is limited to investing up to 20% of its total assets in such securities. Conversely, High Yield Fund is also limited to investing up to 20% of its total assets in securities rated higher than BB or the equivalent, compared to 35% for Plus Fund. Securities rated below B have greater risks and include securities in default or at greater risk of default. Plus Fund may invest no more than 15% of its total assets in securities that are in default at the time of purchase. FEDERAL INCOME TAX CONSIDERATIONS. The Funds will not recognize any gain or loss for federal income tax purposes by reason of the Reorganization. Plus Fund's acquisition of High Yield Fund's assets ("Assets") in exchange solely for Plus Fund Shares (and cash in lieu of certain fractional Plus Fund Shares) and Plus Fund's assumption of High Yield Fund's liabilities, followed by the PRO RATA distribution of Plus Fund Shares and cash or fractional shares, as appropriate, to High Yield Fund stockholders constructively in exchange for their High Yield Fund shares, will qualify as a reorganization within the meaning of section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"), and each Fund will be "a party to a reorganization" within the meaning of section 368(b) of the Code. Plus Fund's basis for the Assets will be the same as that of High Yield Fund immediately before the Reorganization, and Plus Fund's holding period for the Assets will include High Yield Fund's holding period. A High Yield Fund stockholder's aggregate basis for the Plus Fund Shares to be received by it in the Reorganization will be the same as the aggregate basis for its High Yield Fund shares to be constructively surrendered in exchange for those Plus Fund Shares less the basis of any fractional Plus Fund Share deemed sold, and its holding period for those Plus Fund Shares will include its holding period for those High Yield Fund shares, provided the stockholder held them as capital assets on the Closing Date. COMPARISON OF PRINCIPAL RISK FACTORS PRIMARY DIFFERENCES IN INVESTMENT RISKS OF THE FUNDS High Yield Fund and Plus Fund invest in substantially similar securities in the U.S. and foreign bond markets and they are subject to substantially the same investment risks. Plus Fund, however, is subject to additional risks due to its use of leverage and its ability to invest a larger portion of its portfolio in lower-rated securities. LEVERAGE Plus Fund is authorized to borrow money for investment purposes, which constitutes leverage. Leverage is a speculative technique that increases Plus Fund's exposure to risk of capital loss but that also creates an opportunity for an increased return for Plus Fund's stockholders. Plus Fund can also borrow money for temporary or emergency purposes. By contrast, High Yield Fund can only borrow money for temporary or emergency purposes. 5 Plus Fund may leverage up to 33 1/3% of its total assets (including the amount obtained through leverage), but its current operating policy is to maintain borrowings in an amount ranging between approximately 26-31% of total assets. Pursuant to a Revolving Credit and Security Agreement with Corporate Receivables Corporation, Citibank, N.A. and Citicorp North America, Inc. ("Credit Agreement"), Plus Fund has obtained a secured line of credit under which it can borrow up to $200,000,000 for investment purposes. During the twelve months ended January 31, 2000, the Fund maintained outstanding borrowings under this line of credit in amounts ranging between approximately $__________ and $____________. These borrowings have represented between approximately __% and __% of Plus Fund's total assets. As of January 31, 2000, Plus Fund had $167 million in outstanding borrowings, representing about 27% of its total assets. Following the Reorganization, Plus Fund anticipates increasing its borrowings so as to maintain its leverage within a range of between 26% and 31% of its increased total assets. Pursuant to the Credit Agreement, Plus Fund must maintain collateral, segregated with the Fund's custodian and pledged to secure the Fund's obligations under the line of credit, having a value that at all times is equal to at least 250% of Plus Fund's outstanding borrowings under the line of credit. Plus Fund also must maintain eligible assets having a value equal to at least 300% of its outstanding borrowings. The required collateral (as well as the assets used to satisfy the 300% asset coverage requirement) must be comprised of securities or other assets in the Fund's portfolio that satisfy certain eligibility requirements. For example, the Fund may not count more than 10% of its assets invested in securities rated below CCC or the equivalent or more than 40% of its assets invested in securities rated CCC or below or the equivalent toward either requirement. Subject to certain conditions, the Fund is able to substitute eligible collateral as necessary in order to effect portfolio transactions, and Mitchell Hutchins does not believe that Plus Fund's obligation to maintain collateral will impede the Fund's ability to manage its assets in accordance with its investment objectives. Similarly, while the collateral and asset coverage eligibility requirements could limit the Fund's ability to invest in securities rated CCC or below or the equivalent, Mitchell Hutchins does not believe that there will be any practical effect on the Fund's ability to invest in these low-rated securities to the extent desired by its portfolio managers. Capital raised through leverage is subject to interest costs, which could exceed the income and appreciation on the assets purchased with the proceeds of the leverage. Under the Credit Agreement, Plus Fund pays interest at a rate that normally is comparable to market commercial paper rates. The Fund also pays certain other fees in connection with the line of credit, which increase the cost of borrowing over the stated interest rate. During the year ended January 31, 2000, Plus Fund paid interest and other fees ranging from ____% to ____% on its outstanding borrowings. Plus Fund's borrowings under the Agreement and any other transactions involving Fund indebtedness (other than for temporary or emergency purposes) are considered "senior securities" for purposes of the Investment Company Act of 1940, as amended ("1940 Act"), and constitute leverage. Unless the income and capital appreciation, if any, on assets acquired with borrowed funds or other leverage proceeds exceed the cost of the leverage, the use of leverage will diminish Plus Fund's investment performance. Successful use of leverage depends on Mitchell Hutchins' ability to predict correctly interest rates and market movements. There is no assurance that the use of a leveraging strategy will be successful during any period in which it is used. Under the 1940 Act, Plus Fund is not permitted to borrow or otherwise incur indebtedness constituting senior securities unless immediately thereafter the Fund has total assets (including the proceeds of the indebtedness) at least equal to 300% of the amount of the indebtedness. Stated another way, the Fund may not borrow for investment purposes more than 33 1/3% of its total assets, including the amount borrowed. The Fund also must maintain this 300% "asset coverage" for as long as the indebtedness is outstanding. The 1940 Act provides that the Fund may not declare any cash dividend or other distribution on Plus Fund Shares, or purchase any Plus Fund Shares (through tender offers or otherwise), unless it would satisfy this 300% asset coverage after deducting the amount of the dividend, other distribution or share purchase price, as the case may be. The 300% asset coverage requirement under the 1940 Act is substantially the same as the 300% asset coverage requirement that is imposed on Plus Fund under its Credit Agreement, except that assets used to satisfy the 1940 Act requirement are not subject to special eligibility requirements. 6 CREDIT QUALITY OF SECURITIES Plus Fund normally invests at least 65% of its total assets in (i) income producing debt securities that are rated lower than Baa by Moody's Investors Service, Inc. ("Moody's"), lower than BBB by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), comparably rated by another nationally recognized statistical rating organization (collectively with Moody's and S&P, "Rating Agencies") or, if unrated, determined to be of equivalent quality by Mitchell Hutchins and (ii) equity securities (including common stocks, rights, and warrants for equity securities) that are attached to, or are part of a unit including, such debt securities. Plus Fund may invest up to 15% of its total assets in securities that are rated as low as D (which normally are in default at the time of purchase). Plus Fund's ability to invest in securities rated CCC or lower or the equivalent is somewhat limited by the asset coverage and other requirements under the Credit Agreement. Mitchell Hutchins does not believe, however, that these requirements will prevent Plus Fund from investing to the extent it deems desirable in these lowest rated securities. In addition, Plus Fund may invest up to 35% of its total assets in investment grade securities (I.E., securities rated Baa/BBB or higher) of private or government issuers, equity securities of lower-rated or comparable issuers (issuers whose debt securities are lower-rated or who Mitchell Hutchins determines to be of comparable quality), money market instruments and municipal obligations. High Yield Fund normally invests at least 80% of its total assets in securities rated Ba or B by Moody's, BB or B by S&P or comparably rated by another Rating Agency. The Fund may invest up to 20% of its total assets in securities rated higher or lower than these levels, including securities rated as low as D, and in unrated securities that Mitchell Hutchins determines to be of comparable quality to rated securities in which High Yield Fund can invest. High Yield Fund also may acquire equity securities when attached to, or as part of a unit including, debt securities, or in connection with a conversion or exchange of debt securities. High Yield Fund, however, may not invest in other equity securities. For both Funds, the determination of whether a security is in a particular rating category, and whether the above percentage limitations are met, will be made at the time of investment. Mitchell Hutchins assesses securities on the basis of the highest rating assigned by any Rating Agency. Securities rated BB or Ba are considered to be within the "upper tier" of the high yield, high risk income securities market and securities rated B are considered to be in the "middle tier" of this market. Securities within these two tiers constitute the largest portions of this market. Investments in securities that are rated Ca or lower by Moody's, CC or lower by S&P, and comparable securities are extremely speculative and involves significant risk. Securities rated D and comparable unrated securities may be in default at the time of purchase. These securities frequently do not produce income while they are outstanding and may require the Funds to bear certain extraordinary expenses in order to protect and recover their investment. To the extent Plus Fund pursues its secondary investment objective of capital appreciation through investment in these securities, its ability to achieve current income for its stockholders may be diminished. 7 RISKS COMMON TO BOTH FUNDS MARKET PRICE AND NET ASSET VALUE OF SHARES Shares of closed-end investment companies, such as the Funds, frequently trade at a discount to their NAVs. Whether an investor will realize gains or losses upon the sale of shares of either Fund does not depend directly upon changes in the Fund's NAV, but rather upon whether the market price of the shares at the time of sale is above or below the investor's purchase price for the shares. The market price of each Fund's shares is determined by such factors as relative demand for and supply of shares in the market, general market and economic conditions, changes in the Fund's NAV and other factors beyond the control of the Fund. This market risk is separate and distinct from the risk that each Fund's NAV may decrease. Due to differences in the market price and NAV of the Funds' shares, High Yield Fund stockholders who exchange their shares for Plus Fund Shares at NAV may receive Plus Fund Shares with an aggregate market value that is higher or lower than the market value of their High Yield Fund shares. The reason for this difference is that the relative market prices of the Funds' shares in relation to their NAVs are likely to be different; i.e., the Funds' shares are likely to trade at different discounts or premiums. As of ___________, 2000 shares of High Yield Fund were trading at a discount of __%, compared to __% for Plus Fund. It is likely, however, that one or both of these discount levels will change by the Closing Date. For a comparison to the historical trading discounts and premiums for each Fund's shares, see "Comparison of the Funds - Trading History - Share Price Data." The Funds' shares are designed primarily for long-term investors. Investors in the Funds' shares should not view the Funds as vehicles for trading purposes. LOWER-RATED DEBT SECURITIES Compared to higher-quality debt securities, securities rated below investment grade, often referred to as "junk bonds," involve greater risk of default or price changes due to changes in the credit quality of the issuer because they are generally unsecured and may be subordinated to other creditors' claims. There is a greater possibility that adverse changes in the financial condition of the issuer, or in general economic conditions, or both, or an unanticipated rise in interest rates may impair the ability of the issuers of these securities to make payments of interest and principal. The value of junk bonds often fluctuates in response to issuer, political or economic developments and can decline significantly over short periods of time or during periods of general or regional economic difficulty. During those times, the bonds may be difficult to value or sell at a fair price. Credit ratings on junk bonds do not necessarily reflect their actual market risk. 8 Changes in a Rating Agency's rating of any income security or in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect cash income derived from such securities, but will affect a Fund's net asset value. The Funds do not necessarily dispose of a security when its rating is reduced below the rating at the time of purchase, although Mitchell Hutchins monitors all investments to determine whether continued investment is consistent with the Fund's investment objectives. Because of the greater number of investment considerations involved in investing in lower-rated income securities, the achievement of the Funds' investment objectives depends more on Mitchell Hutchins' analytical abilities than would be the case if it were investing primarily in securities in the higher rating categories. The values of lower-rated income securities, like those of other income securities, generally fluctuate in response to changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of such securities. Conversely, during periods of rising interest rates, the value of such securities will generally decline. These fluctuations can be expected to be greater for investments in income securities with longer maturities than for investments in income securities with shorter maturities. The secondary market prices of lower-rated securities are often affected to a lesser extent by changes in interest rates and to a greater extent by changes in general economic conditions and business conditions affecting the issuers of such securities and their respective industries. Negative publicity or investor perceptions may also adversely affect the values of lower-rated securities. 9 INVESTING IN FOREIGN SECURITIES Each fund may invest in foreign securities, including securities of issuers in emerging market countries. Investments in foreign securities may be affected by, among others, the following factors: o CURRENCY EXCHANGE RATES - The dollar value of the Funds' investments denominated in foreign currencies will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded. Plus Fund may invest up to 15% of its total assets in foreign-denominated securities, while High Yield Fund is limited to 10% of its net assets. o POLITICAL AND ECONOMIC CONDITIONS - The value of the Funds' foreign investments may be adversely affected by political and social instability in their home countries and by changes in economic or taxation policies in those countries. o REGULATIONS - Foreign companies generally are subject to less stringent regulations, including financial and accounting controls, than are U.S. companies. As a result, there generally is less publicly available information about foreign companies than about U.S. companies. In addition, certain countries may impose expropriation constraints on the assets of certain companies. o MARKETS - The securities markets of other countries are smaller than U.S. securities markets. As a result, many foreign securities may be less liquid and their prices may be more volatile than U.S. securities. The risks described above for foreign securities may be more acute for the Funds' investments in emerging market countries. These countries typically have economic and political systems that are relatively less mature, and can be expected to be less stable, than those of developed countries. For example, many emerging market countries have, in the past, experienced high rates of inflation or sharply devalued their currencies against the U.S. dollar, thereby causing the value of investments in companies located in those countries to decline. Emerging market countries may have policies that restrict investment by foreigners in those countries, and there is a risk of government expropriation or nationalization of private property. The possibility of low or non-existent trading volume in the securities of companies in emerging markets may also result in a lack of liquidity and in price volatility. Issuers in emerging markets typically are subject to a greater degree of change in earnings and business prospects than are companies in developed markets. Transaction costs are often higher in emerging market countries and there may be additionsl risks and delays in custody and settlement procedures. 10 ORIGINAL ISSUE DISCOUNT, ZERO COUPON AND PAYMENT-IN-KIND SECURITIES The Funds may invest in discount securities, including zero coupon securities, other securities issued with original issue discount ("OID") and payment-in-kind ("PIK") securities. Zero coupon securities pay no interest to holders prior to maturity. When a zero coupon security is held to maturity, its entire investment return comes from the difference between its purchase price and its maturity value. PIK securities may pay interest either in cash or in the form of additional securities. The portion of the OID that accrues each year on zero coupon and other OID securities in which a Fund invests, and the "interest" received or accrued on a Fund's PIK securities, must be included in its income annually. To qualify for tax treatment as a regulated investment company ("RIC") and to avoid a federal excise tax, each Fund may be required to distribute as dividends amounts that are greater than the total amount of cash it actually receives. These distributions must be made from the Fund's cash assets or, if necessary, from the proceeds of sales of portfolio securities. As a result, each Fund may be unable to purchase additional securities with cash used to make such distributions, and its current income ultimately may be reduced as a result. Zero coupon, other OID and PIK securities usually trade at a substantial discount from their face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities that make current distributions of interest in cash. CALL FEATURES A substantial portion of the securities held by the Funds may permit the issuer to "call," or redeem, its securities prior to maturity. If an issuer were to redeem securities held by a Fund during a time of declining interest rates, the Fund probably would not be able to reinvest the proceeds in securities of comparable quality providing the same investment return as the securities redeemed. The existence of a call feature may limit the potential for such a security to increase in value during periods of declining interest rates. PREMIUM SECURITIES The Funds may each invest a substantial portion of their assets in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. As a result, the purchase of such securities provides the Funds with a higher level of investment income distributable to stockholders on a current basis than if the Funds purchased securities bearing current market rates of interest. If such premium securities are called prior to maturity, the Funds may recognize a capital loss. HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS Options, futures contracts, options on futures contracts, forward currency contracts and interest rate swap transactions are derivatives and their use entails special risks. The value of "derivatives" - so called because their value "derives" from the value of an underlying asset, reference rate or index - may rise or fall more rapidly than other investments. For some derivatives, it is possible for a Fund to lose more than the amount it invested in the derivative. If a Fund uses derivatives to adjust or "hedge" the overall risk of its portfolio, it is possible that the hedge will not succeed. This may happen for various reasons, including unexpected changes in the value of the derivatives that are not matched by opposite changes in the value of the rest of the Fund's portfolio. 11 PROPOSAL: REORGANIZATION OF HIGH YIELD FUND INTO PLUS FUND INFORMATION ABOUT THE REORGANIZATION Under the Plan, High Yield Fund will reorganize into Plus Fund and High Yield Fund's stockholders will become stockholders of Plus Fund. Each High Yield Fund stockholder's shares of High Yield Fund will be converted into an equivalent dollar amount of full Plus Fund Shares plus fractional shares for High Yield Fund stockholders that participate in High Yield Fund's Dividend Reinvestment Plan and cash in lieu of any fractional shares for all other High Yield Fund stockholders, computed based on the NAV per share of each Fund on the Closing Date. No sales charge or fee of any kind will be charged to High Yield Fund stockholders in connection with their receipt of Plus Fund Shares in the Reorganization. Neither Fund will recognize any gain or loss for federal income tax purposes as a result of the Reorganization. High Yield Fund stockholders will recognize no gain or loss except with respect to any cash received in lieu of fractional Plus Fund Shares. The Reorganization is expected to occur by __________ ___, 2000, or by such later date as the parties may agree in writing. The Reorganization is contingent upon both stockholder approval and each Fund satisfying the terms of the Plan. Under Maryland law, stockholders of a corporation whose shares are traded on a national securities exchange, such as the Funds' shares, are not entitled to demand the fair value of their shares upon a merger; therefore, the stockholders of the Funds will be bound by the terms of the Reorganization under the Plan. However, any stockholder of either Fund may sell his or her shares of common stock on the New York Stock Exchange ("NYSE"). The shares of High Yield Fund may not be listed on the NYSE or available for trading there for several days prior to the date of the Reorganization. After the Closing Date, High Yield Fund would deregister as an investment company under the 1940 Act and would terminate its separate existence under Maryland law. In addition, High Yield Fund's shares of common stock would be removed from listing on the NYSE and withdrawn from registration under the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"). The Plan may be terminated and the Reorganization abandoned, whether before or after approval by High Yield Fund's stockholders, at any time prior to the Closing Date (i) by the mutual consent of the Board of Directors of each Fund; or (ii) by either Fund (a) if the other Fund materially breaches any representation, warranty, or covenant contained in the Plan, (b) if the conditions to that Fund's obligations under the Plan have not been satisfied or waived, or (c) if that Fund's Board, in its sole discretion, determines that proceeding with the Reorganization would not be in the best interests of its stockholders. If the Reorganization has not been consummated by _______, 2000, the Plan automatically will terminate, unless a later date is mutually agreed upon by the Board of Directors of each Fund. BOARD CONSIDERATIONS The High Yield Fund Board, including the Board Members who are not "interested persons," as that term is defined in the 1940 Act, of either High Yield Fund or Plus Fund ("Independent Board Members"), determined that the Reorganization is in the best interests of High Yield Fund and voted unanimously to recommend that stockholders approve the Plan. 12 Consistent with the policies set forth in High Yield Fund's Prospectus, the Board from time-to-time considers whether it would be in the best interest of the Fund to take actions designed to eliminate or reduce the discount to NAV at which the Fund's shares trade and to otherwise enhance stockholder value. Such actions include a merger with another investment company, conversion to an open-end investment company, open market share repurchase offers, and tender offers. After considering various actions to address the trading discount and maximize stockholder value, High Yield Fund's Board unanimously approved a proposal to reorganize High Yield Fund into Plus Fund. At the Boards' November 11, 1999 meetings, Mitchell Hutchins presented its assessments of High Yield Fund and Plus Fund and suggested that both Funds could benefit from a merger. The Boards of each Fund considered Mitchell Hutchins' evaluations and requested that Mitchell Hutchins make a final proposal at a subsequent board meeting. Mitchell Hutchins recommended the Reorganization to the Boards of High Yield Fund and Plus Fund at Board meetings held on December 17, 1999. Mitchell Hutchins advised that both Funds' stockholders would benefit from the economies of scale (i.e., lower operating expense ratios) and opportunities for broader diversification that a larger asset base would provide. They also noted that High Yield Fund's stockholders could additionally benefit from the ability to use leverage through borrowing. Mitchell Hutchins also advised that the Reorganization would permit High Yield Fund's stockholders to gain the added flexibility of Plus Fund's slightly broader investment parameters. Further, the Reorganization itself could enhance the ability of securities analysts to follow Plus Fund because it will eliminate any confusion in the marketplace that results from two funds with substantially similar names, as well as investment objectives and investment policies, being managed by the same investment adviser. As part of its consideration, the High Yield Fund Board examined a number of factors with respect to the Reorganization, including: (1) the compatibility of the Funds' investment objectives, policies and restrictions; (2) the Funds' respective investment performances; (3) the effect of the Reorganization on the expense ratio of Plus Fund and that expense ratio relative to High Yield Fund's current expense ratio; (4) the costs to be incurred by each Fund as a result of the Reorganization; (5) the tax consequences of the Reorganization; (6) Mitchell Hutchins' assessment of the likely impact on High Yield Fund's stockholders of the receipt of Plus Fund Shares at NAV; and (7) the continuity of portfolio management. The Board also considered the potential benefits of the Reorganization to other persons, including Mitchell Hutchins and its affiliates. The Board considered the investment objectives and policies of the Funds and noted that their portfolios have had substantially similar risk profiles based on the types of securities the Funds have held. The Board noted that Plus Fund is subject to greater risk than High Yield Fund because it uses leverage and may invest to a greater extent in lower-rated securities. The use of leverage exposes Plus Fund to greater risk (and greater return) than other investment practices. Despite these differences, the Board concluded that the Funds' investment objectives and policies are reasonably compatible. Mitchell Hutchins also informed the Board that it believed that the additional risks of leverage and of investing in lower-rated securities were warranted by the opportunity for higher yields. 13 The Board also took into account the compatibility of the current portfolio holdings of High Yield Fund and Plus Fund. Mitchell Hutchins informed the Board that the two Funds' portfolios were sufficiently compatible that no securities would need to be sold to accommodate the Reorganization. The Board also considered the level and quality of investment advisory services provided by Mitchell Hutchins to both Funds and decided that Plus Fund stockholders would benefit from Mitchell Hutchins' continued supervision of portfolio management services after the Reorganization. In addition, the Board considered the historic performance of High Yield Fund in relation to the performance of Plus Fund. Mitchell Hutchins advised the Board that, while past performance provides no guarantee of future results, Plus Fund has provided a greater total return based on net asset value than High Yield Fund for the year ended January 31, 2000. Mitchell Hutchins estimated that the yield for Plus Fund was higher as of the same date. The Board also considered the impact the Reorganization would have on expenses. In analyzing expenses, the Board evaluated the investment advisory and administration fees paid by the Funds. High Yield Fund and Plus Fund pay different advisory and administrative fees at different rates, and they calculate their fees in different ways. High Yield Fund pays Mitchell Hutchins investment advisory and administration fees, computed weekly and paid monthly, of 0.90% of its average weekly net assets. Plus Fund pays Mitchell Hutchins fees, computed weekly and paid monthly, of 0.70% of its average weekly total assets minus liabilities other than the aggregate indebtedness constituting leverage ("Managed Assets"). The investment advisory and administration fees payable to Mitchell Hutchins when Plus Fund has outstanding borrowings is higher than when it does not because the fee is calculated as a percentage of Managed Assets, which include assets purchased with the proceeds of those borrowings. Mitchell Hutchins indicated to the Board that Plus Fund would likely continue to borrow about 26-31% of the Fund's total assets (including the amount obtained by leverage) after the Reorganization, assuming similar market conditions. The Board recognized that, given the level of Plus Fund's expected borrowings, the effective investment advisory and administration fee rate would exceed 0.90% of Plus Fund's weekly net assets. For example, at the level of Plus Fund's average borrowings for the twelve months ended January 31, 2000 (27% of total assets), the Fund paid Mitchell Hutchins a fee equal to an effective annual rate of 0.96% of the Fund's average weekly net assets. The Board recognized that the use of leverage requires greater allocation of resources within Mitchell Hutchins and that a slightly higher net advisory fee was therefore appropriate. In addition to considering the potential increase in the rate of investment and advisory fees (when expressed as a percentage of net assets), the Board discussed other expenses paid by High Yield Fund stockholders. Based on Mitchell Hutchins' preliminary calculations, Mitchell Hutchins estimated that after the Reorganization, on a PRO FORMA basis, Plus Fund Shares would have total operating expenses, excluding interest and Reorganization expenses, that would be a lower percentage of net assets than those of High Yield Fund. The Board noted, however, the Reorganization would result in an increase in total annual operating expenses (including interest payments) for High Yield Fund stockholders. The Board also noted that estimates of the operating expenses of the combined Fund, as a percentage of net assets, would be lower than that of either Fund, excluding interest and Reorganization expenses. The Board also considered Mitchell Hutchins' assessment that the yield for Plus Fund would likely be higher than that of High Yield Fund and that the relatively higher 14 yield should serve to offset the effect of the interest expense. For more information on the comparative fees and expenses of the Funds, see "Comparison of the Funds -- Fees and Expenses," below. Mitchell Hutchins advised the Board that each High Yield Fund stockholder would receive full Plus Fund Shares, plus cash or a fractional Plus Fund Share, as appropriate, having an aggregate NAV equal to the NAV of his or her High Yield Fund shares. Due to differences in the market discounts on the Funds' shares, High Yield Fund stockholders may, however, receive Plus Fund Shares with an aggregate market value that is higher or lower than the market value of the shares previously held. The Board noted that, while Mitchell Hutchins had no reason to believe that the Reorganization would result in High Yield Fund's stockholders receiving shares with a market discount greater than they would otherwise have experienced, there could be no assurance that the market discount to NAV of Plus Fund would not be greater than the market discount to NAV of High Yield Fund, or that the market discount to NAV of Plus Fund Shares might not be greater in the future. Finally, the Board reviewed the principal terms of the Plan and noted that the securities and other assets held by High Yield Fund at the time of the Reorganization will be valued at full market value, that the Reorganization would be tax-free to High Yield Fund, and that High Yield Fund stockholders will have ownership of a compatible fund. The Board also noted that High Yield Fund stockholders would recognize no gain or loss, except with respect to any cash received in lieu of fractional Plus Fund Shares. On the basis of the information provided to each Board and on each Board's evaluation of that information, the Boards determined that the proposed Reorganization will not dilute the interests of stockholders of each Fund and that it is in the best interest of each Fund. Therefore, each Fund's Board voted unanimously to approve the Plan, and High Yield Fund's Board voted unanimously to recommend that High Yield Fund stockholders approve the Plan. THE PLAN The Plan provides for the acquisition by Plus Fund of all of High Yield Fund's assets in exchange for Plus Fund Shares and the assumption by Plus Fund of all of High Yield Fund's liabilities. High Yield Fund will then distribute to its stockholders the full Plus Fund Shares plus fractional Plus Fund Shares for participants in High Yield Fund's Dividend Reinvestment Plan and cash in lieu of fractional shares for all other stockholders. Each High Yield Fund stockholder will receive full Plus Fund Shares and a fractional share or cash, as appropriate, equal in aggregate NAV to the aggregate NAV of the stockholder's High Yield Fund shares at the time of the Reorganization. These transactions are scheduled to occur at [4:00] p.m., Eastern time, on _________, 2000, or on such later date as the conditions to consummation of the Reorganization are satisfied. High Yield Fund will be liquidated as soon as is practicable after the Closing Date. See "Additional Information About the Reorganization" below. High Yield Fund and Plus Fund each will receive an opinion of Kirkpatrick & Lockhart LLP, their counsel, to the effect that the Reorganization will constitute a tax-free reorganization within the meaning of section 368(a)(1)(C) of the Code. Accordingly, neither Fund will recognize any gain or loss for federal income tax purposes as a result of the Reorganization. In addition, High Yield Fund stockholders would recognize no gain or loss, except with respect to any cash received in lieu of fractional Plus Fund Shares. To the extent High Yield Fund sells securities prior to the Closing Date, there may be net recognized gains or losses to the Fund. Any net recognized gains would increase the amount of any distribution made to stockholders of High Yield Fund 15 prior to the Closing Date. See "Additional Information About the Reorganization - -- Federal Income Tax Considerations" below. If the Reorganization is not approved by stockholders at the Meeting or the conditions of the Plan are not met, High Yield Fund will continue to operate as a separate closed-end fund, and the Board will then consider other options and alternatives for the future of the Fund. Either Board may, in its discretion, terminate the Plan prior to Reorganization. COMPARISON OF THE FUNDS FORMS OF ORGANIZATION High Yield Fund and Plus Fund are diversified, closed-end management investment companies registered under the 1940 Act and organized as Maryland corporations on June 11, 1993 and April 24, 1998, respectively. High Yield Fund commenced operations on December 7, 1993 and Plus Fund commenced operations on June 26, 1998. Both Funds' shares are traded on the NYSE. The operations of each Fund are governed by its Articles of Incorporation, Bylaws and Maryland law. The overall direction and supervision of each Fund is the responsibility of its Board, which has the primary duty of ensuring that the Fund's general investment policies and programs are adhered to and that the Fund is properly administered. INVESTMENT OBJECTIVES The investment objectives of High Yield Fund and Plus Fund are substantially similar. High Yield Fund's investment objective is high current income. The primary investment objective of Plus Fund is high income. Its secondary objective is capital appreciation. Both Funds seek to achieve their objective of high income by investing primarily in a diversified portfolio of lower-rated, income-producing debt and related equity securities. Plus Fund seeks to achieve its secondary objective of capital appreciation by investing in debt or equity securities that Mitchell Hutchins expects may appreciate in value as a result of favorable developments affecting the business or prospects of the issuer, or as a result of declines in long-term interest rates. INVESTMENT POLICIES The primary differences in the investment policies of High Yield Fund and Plus Fund are Plus Fund's use of leverage and its greater flexibility in choosing the credit quality of its portfolio securities. Please see "Comparison of Principal Risk Factors--Primary Differences in Investment Risks of the Funds" for a comparison of the credit quality of the securities in which the Funds may invest. High Yield Fund may invest up to 35% of its net assets in securities of foreign issuers, including foreign issuers in emerging market countries, with no more than 10% of its net assets in securities of foreign issuers, that are denominated and traded in foreign currencies. Plus Fund may invest up to 35% of total assets in securities of foreign issuers, including foreign issuers in emerging market countries, but may not invest more than 15% of total assets in 16 securities denominated in currencies other than the U.S. dollar. Each Fund may engage in hedging strategies, such as options, futures and forward currency contracts, to attempt to reduce the overall risk of its investment portfolio, enhance income, realize gains or manage its foreign currency exposure. In selecting investments for both Funds, Mitchell Hutchins relies on the expertise of the Fund's portfolio manager, as well as his team of analysts. The investment process incorporates three key steps: industry selection, company selection and security selection. Industry selection consists of an analysis of economic factors, industry dynamics and yield spreads to determine which sectors of the market are the most attractive for investment. Company selection combines Mitchell Hutchins' proprietary financial forecasting model with fundamental credit analysis to determine which companies are the most attractive investment candidates. Mitchell Hutchins also consults third party research and conducts company visits as part of this selection process. A security selection process is done to determine the appropriate type of security (such as lower-rated bonds, common stock, etc.). Final security selection depends on relative values based on a company's anticipated cash flow, interest and asset coverage, leverage and earnings prospects. Mitchell Hutchins' portfolio management team also uses a disciplined sell strategy under which a security will be sold when the income or total return potential declines relative to its risk level, or when the security becomes overvalued when compared to its industry. INVESTMENT LIMITATIONS High Yield Fund generally may not purchase securities on margin. Plus Fund is not restricted in its ability to purchase securities on margin, but in practice it does not do so to any material extent. High Yield Fund may not engage in short sales of securities or maintain a short position, except for short sales "against the box" and short positions in connection with its use of derivative instruments. Plus Fund is not limited in its ability to maintain short positions. However, neither Fund currently engages in short sales. 17 LEVERAGE Plus Fund borrows money for investment purposes. Such borrowings constitute leverage, a speculative technique. The Fund is authorized to utilize leverage in an amount up to 33 1/3 of its total assets (including the amount obtained through leverage), but is current operating policy is to maintain borrowing in an amount equal to approximately 26-31% of total assets. Plus Fund has obtained a secured line of credit under which it can borrow $200,000,000 for investment purposes. (See "Comparison of Principal Risk Factors - Primary Differences in Investment Risks of the Funds.") As of January 31, 2000, Plus Fund had $167 million in outstanding borrowings under that line of credit, representing about 27% of its total assets. Plus Fund and can also engage in leverage through other bank borrowings or other transactions involving indebtedness, through the issuance of preferred stock, through reverse repurchase transactions or through dollar rolls. However, the Fund's ability to use such other leverage is limited by the terms of its existing line of credit. Plus Fund will not use leverage if it anticipates that a leveraged capital structure would result in a lower return to stockholders than the Fund could obtain over time without leverage. Plus Fund can borrow additional money for temporary or emergency purposes in an amount not to exceed 5% of its total assets (not including the amount so borrowed). By contrast, High Yield Fund can borrow money but only for temporary or emergency purposes and only in an amount not exceeding 10% of its total assets not including the amount borrowed. PORTFOLIO COMPATIBILITY The current portfolio of High Yield Fund, consisting primarily of debt securities of issuers located in the United States, is substantially compatible with Plus Fund's portfolio. It is anticipated that none of High Yield Fund's holdings would need to be sold to accommodate the Reorganization. FEES AND EXPENSES The following table describes the fees and expenses that you may pay if you buy and hold shares of High Yield Fund and Plus Fund. The PRO FORMA information reflects the anticipated effects of the Reorganization. The information set forth below is based on the Funds' fees and expenses for the twelve months ended January 31, 2000. 18
PLUS FUND STOCKHOLDER TRANSACTION EXPENSES FOR BOTH FUNDS HIGH YIELD PRO FORMA FUND PLUS FUND COMBINED - ------------------------------------------------------------------------------------------------------------- Maximum Sales Charge (load) Imposed on Purchases (AS A PERCENTAGE OF OFFERING PRICE).. None(1) None(1) None(1) Dividend Reinvestment Plan Fees ............... None None None ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) - ------------------------------------------------------------------------------------------------------------- Investment Advisory and Administration Fees.. 0.90% 0.96% 0.96% Interest Payments on Borrowed Funds.......... -- 2.24% 2.24% Other Expenses(2)............................ 0.33% 0.26% 0.25% Total Annual Fund Operating Expenses(2)...... 1.23% 3.46% 3.45%
1 Purchases and sales of Fund shares on the NYSE are likely to be subject to brokerage fees and related expenses. 2 Note: These figures do not include non-recurring organizational expenses of $135,835 during Plus Fund's initial fiscal period ended May 31, 1999. Had such expenses been included, Plus Fund would have incurred ____% and ____% for Other Expenses and Total Annual Expenses, respectively, and the Plus Fund Pro Forma Combined figures would have reflected ____% and ____% for Other Expenses and Total Annual Expenses, respectively. EXPENSE EXAMPLE The following example is intended to help you compare the costs of investing in Plus Fund, both before and after the Reorganization, with the costs of investing in shares of High Yield Fund. The example assumes that you invest $10,000 at net asset value in each Fund for the time periods indicated. The example also assumes that your investments each have a 5% return each year and that each Fund's operating expenses remain the same. Although your actual returns and costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ============================================================================================================= PLUS FUND.................................. $___ $___ $___ $___ HIGH YIELD FUND............................ ___ ___ ___ ___ PLUS FUND PRO FORMA COMBINED............... ___ ___ ___ ___
SALES CHARGES PLUS FUND SHARES RECEIVED IN CONNECTION WITH THE REORGANIZATION WILL NOT BE SUBJECT TO ANY SALE CHARGE. TRADING HISTORY- SHARE PRICE DATA The shares of Plus Fund are traded on the NYSE under the symbol "HYF." The shares of High Yield Fund are traded on the NYSE under the symbol "PHT." Shares of closed-end management investment companies frequently trade at discounts from their NAVs, and the Funds' shares have also traded at a discount. The following tables set forth, in the case of Plus Fund, for each fiscal quarter since inception and, in the case of High Yield Fund, for each fiscal quarter within the two most recent fiscal years and each fiscal quarter since the beginning of the current fiscal year: (a) the per share high and low sales prices as reported by the NYSE; (b) the NAV per share, based on the Fund's 19 computation as of 4:00 p.m. on the last NYSE business day for the week corresponding to the dates on which the respective high and low prices were recorded; and (c) the discount or premium to NAV represented by the high and low sales prices shown. The range of NAVs and of premiums and discounts for the shares during the periods shown may be broader than is shown in this table. On February ___, 2000, the closing price per share was $_____ and $_____, the NAV per share was $_____ and $_____ and the discount to NAV was (____)% and (____)%, for High Yield Fund and Plus Fund, respectively.
(DISCOUNT) OR CORRESPONDING NET PREMIUM TO NET PLUS FUND SALES PRICE ASSET VALUES ASSET VALUE - ----------------------------------------------------------------------------------------------------------------------- Quarter Ended High Low High Low High Low - ------------- ---- --- ---- --- ---- --- 2/29/00 $_____ $_____ $_____ $_____ ____% _____% 11/30/99 11.75 11.38 11.82 11.65 (0.59) (2.32) 8/31/99 12.63 11.38 12.34 11.97 2.35 (4.93) 5/31/99 12.94 12.13 12.71 12.45 1.81 (2.57) 2/28/99 13.06 12.00 13.01 12.75 0.38 (5.88) 11/30/98 13.63 11.44 12.33 11.92 10.54 (4.03) 8/31/98 15.06 11.75 15.00 13.08 0.40 (10.17) (DISCOUNT) OR CORRESPONDING NET PREMIUM TO NET HIGH YIELD FUND SALES PRICE ASSET VALUES ASSET VALUE - ----------------------------------------------------------------------------------------------------------------------- Quarter Ended High Low High Low High Low - ------------- ---- --- ---- --- ---- --- 1/31/00 $ $ $ $ % % 10/31/99 11.38 9.75 11.76 11.15 (3.23) (12.56) 7/31/99 11.50 11.00 12.18 11.82 (5.58) (6.94) 4/30/99 12.13 11.13 12.05 12.12 0.66 (8.17) 1/31/99 12.75 11.63 12.10 12.13 5.37 (4.12) 10/31/98 13.50 11.31 14.19 12.72 (4.86) (11.08) 7/31/98 14.22 13.38 14.51 14.16 (2.00) (5.51) 4/30/98 14.81 13.69 14.55 14.57 1.79 (6.04) 1/31/98 14.44 13.88 14.36 14.22 0.56 (2.39) 10/31/97 14.38 13.56 14.63 14.27 (1.74) (4.95)
DIVIDENDS AND OTHER DISTRIBUTIONS High Yield Fund distributes all, and Plus Fund distributes substantially all, of its net investment income as monthly dividends. The Funds also annually distribute substantially all realized net capital gain (the excess of net long-term capital gain over net short-term capital loss), realized net short-term capital gain and realized net gains from foreign currency transactions, if any. Each Fund may make additional distributions, if necessary, to avoid a 4% federal excise tax on certain undistributed ordinary income and capital gains. The Funds' monthly dividends may, from time to time, represent more or less than the amount of net investment income earned by the 20 Funds in the period to which the dividend relates. Undistributed net investment income will be available to supplement future dividends, which might otherwise have been reduced by reason of a decrease in the Funds' monthly net income due to fluctuations or expenses. Undistributed net investment income is reflected in the Funds' NAV and, accordingly, a Fund's NAV is reduced when dividends are paid. The dividend rate on each Fund's shares is adjusted from time to time by each Fund's Board of Directors and varies as a result of the Fund's performance. DIVIDEND REINVESTMENT PLAN High Yield Fund and Plus Fund have established Dividend Reinvestment Plans ("Reinvestment Plans") under which all stockholders whose Fund shares are registered in their own names, or in the name of PaineWebber Incorporated ("PaineWebber") or its nominee, have all dividends and other distributions on their shares automatically reinvested in additional shares of the respective Fund, unless such stockholders elect to receive cash. Stockholders in each Fund may affirmatively elect to receive all dividends and other distributions in cash paid by check mailed directly to them by PNC Bank, National Association ("Transfer Agent"), as dividend disbursing agent. Stockholders who hold their shares in the name of a broker or nominee other than PaineWebber (or its nominee) should contact such broker or other nominee to determine whether, or how, they may participate in the Reinvestment Plans. The ability of such stockholders to participate in the Reinvestment Plans may change if their shares of the respective Fund are transferred into the name of another broker or nominee. The Transfer Agent for each Fund serves as agent for the stockholders in administering the Reinvestment Plans. After each Fund declares a dividend or determines to make another distribution, the Transfer Agent, as agent for the participants, receives the cash payment. However, the basis on which each Fund's Transfer Agent acquires Fund shares under the Reinvestment Plan differs. High Yield Fund's Transfer Agent uses the cash that it receives from dividends paid by the Fund to buy Fund shares in the open market, on the NYSE or otherwise, for the participants' accounts. Such shares may be purchased at prices that may be higher or lower than the NAV per share of the Fund at the time of purchase. The number of shares purchased with each distribution for a particular stockholder equals the result obtained by dividing the amount of the distribution payable to that stockholder by the average price per share (including applicable brokerage commissions) that the Transfer Agent was able to obtain in the open market. High Yield Fund will not issue any new shares in connection with its Reinvestment Plan. Plus Fund's Transfer Agent uses the cash that it receives from dividends paid by the Fund to acquire shares for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of unissued but authorized shares from the Fund ("newly issued shares") or (ii) by purchase of outstanding shares on the open market, on the NYSE or elsewhere ("open-market purchases"). If, on the dividend payment date, the NAV per share is equal to or less than the market price per share plus estimated brokerage commissions (such condition being referred to herein as "market premium"), the Transfer Agent invests the dividend amount in newly issued shares on behalf of the participants. The number of newly issued shares to be credited to each participant's account is determined by dividing the dollar amount of the dividend by the NAV per share (but in no event less than 95% of the then current market price per share) on the date the shares are issued. If, on the dividend payment date, the NAV per share is greater than the market value per share (such condition being referred to herein as "market discount"), the Transfer Agent invests the dividend amount in shares acquired on behalf of the participants in open-market purchases. The number of outstanding shares purchased with each 21 purchased with each distribution for a particular stockholder equals the result obtained by dividing the amount of the distribution payable to that stockholder by the average price per share (including applicable brokerage commissions) that the Transfer Agent is able to obtain in the open market. For Plus Fund, if there is a market discount on the dividend payment date, the Transfer Agent has until the last business day before the next date on which the shares trade on an "ex-dividend" basis, but in no event more than 30 days after the dividend payment date ("last purchase date"), to invest the dividend amount in shares acquired in open-market purchases. Since Plus Fund pays monthly income dividends, the period during which open-market purchases can be made exists only from the payment date of the dividend through the date before the next "ex-dividend" date. Typically, this is approximately ten days. If, before the Transfer Agent has completed its open-market purchases, the market price of a share exceeds the NAV per share, the average per share purchase price paid by the Transfer Agent may exceed the Fund's NAV per share, resulting in the acquisition of fewer shares than if the dividend had been paid in newly issued shares on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, Plus Fund's Reinvestment Plan provides that, if the Transfer Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Transfer Agent will cease making open-market purchases and will invest the uninvested portion of the dividend amount in newly issued shares at the earlier of the close of business on the last purchase date or the first day during the purchase period on which the NAV per share equals or is less than the market price per share. Stockholders who participate in Plus Fund's Reinvestment Plan may receive benefits not available to stockholders who do not participate in the Reinvestment Plan. If the market price (plus commissions) of Plus Fund Shares is above their NAV, participants in the Reinvestment Plan receive shares at less than they could otherwise purchase them and have shares with a cash value greater than the value of any cash dividends they would have received on their Plus Fund Shares. If the market price plus commissions is below the NAV, participants receive dividends in Plus Fund Shares with a NAV greater than the value of any cash dividends they would have received on their shares. However, there may be insufficient Plus Fund Shares available in the market to distribute dividends in shares at prices below the NAV. Also, since Plus Fund does not redeem its shares, the price on resale may be more or less than the NAV. Each Fund's Transfer Agent maintains all stockholder accounts in its Reinvestment Plans and furnishes written confirmations of all transactions in the accounts, including information needed by stockholders for personal and tax records. Shares in the account of each Reinvestment Plan participant are maintained by the Transfer Agent in un-certificated form in the name of the participant. Each High Yield Fund stockholder's proxy will include those shares of stock purchased pursuant to its Reinvestment Plan. There is no charge to participants for reinvesting dividends or other distributions. The Transfer Agents' fees for the handling of reinvestment of distributions are paid by the respective Funds. However, each participant pays a PRO RATA share of brokerage commissions incurred with respect to the Transfer Agents' open market purchases of Fund shares in connection with the reinvestment of distributions. 22 The automatic reinvestment of dividends and other distributions in Fund shares does not relieve participants of any income tax that may be payable on such distributions. A stockholder who has elected to participate in a Reinvestment Plan may terminate participation in the Reinvestment Plan at any time without penalty, and stockholders who have previously terminated participation in a Reinvestment Plan may rejoin it at any time. Changes in elections must be made in writing to the Transfer Agent and should include the stockholder's name and address as they appear on the share certificate or in the Transfer Agent's records. An election to terminate participation in a Reinvestment Plan, until such election is changed, will be deemed to be an election by a stockholder to take all subsequent dividends in cash. An election will be effective only for dividends declared and having a record date at least ten days after the date on which the election is received. Each Fund has reserved the right to amend or terminate its Reinvestment Plan with respect to any dividend if notice of the change is sent to participants at least 30 days before the record date for such dividend. The Reinvestment Plans also may be amended or terminated by the Transfer Agent by at least 30 days' written notice to all participants. All correspondence concerning the Reinvestment Plans should be directed to the appropriate Fund's Transfer Agent at PNC Bank, National Association, c/o PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809. MANAGEMENT OF THE FUNDS The overall management of the business and affairs of each Fund is vested with its Board of Directors. The members of each Board are the same. Each Board approves all significant agreements between the respective Fund and persons or companies furnishing services to it, including the Fund's agreements with its investment adviser and administrator, custodian and transfer and dividend disbursing agent and registrar. The day-to-day operations of each Fund are delegated to its officers and to Mitchell Hutchins, subject to each Fund's investment objective and policies and to general supervision by the Board of Directors. Subject to the supervision of each Fund's Board, Mitchell Hutchins provides investment advisory and administration services to each Fund pursuant to an Investment Advisory and Administration Contract dated November 23, 1993 for High Yield Fund and June 22, 1998 for Plus Fund ("Advisory Contracts"). Pursuant to each Advisory Contract, Mitchell Hutchins provides a continuous investment program for the respective Fund, makes investment decisions and places orders to buy, sell or hold particular securities. Mitchell Hutchins also supervises all matters relating to the operation of the Fund and obtains for it corporate officers, clerical staff, office space, equipment and services. The portfolio manager responsible for the day-to-day management of both Funds is James F. Keegan, a senior vice president of Mitchell Hutchins. Mr. Keegan has been employed by Mitchell Hutchins since March 1996. Prior to March 1996, he was director of fixed income strategy and research of Merrion Group, L.P. Other members of the Mitchell Hutchins High Income Group provide input on market outlook, interest rate forecasts, and other considerations pertaining to high yield, high risk income securities. 23 High Yield Fund and Plus Fund pay different advisory and administrative fees at different rates, and they calculate their fees in different ways. High Yield Fund pays Mitchell Hutchins investment advisory and administration fees, computed weekly and paid monthly, of 0.90% of its average weekly net assets. Plus Fund pays Mitchell Hutchins fees, computed weekly and paid monthly, of 0.70% of its Managed Assets. Because the fees are calculated as a percentage of Managed Assets, and given the level of Plus Fund's current borrowings and its expectation to maintain borrowings in an amount equal to approximately 26-31% of its total assets, it is likely that Plus Fund's effective investment advisory and administration fee rate will continue to exceed 0.90% of its net assets. Each Fund also incurs various other expenses in its operations, such as custody and transfer agency fees, brokerage commissions, professional fees, expenses of board and stockholder meetings, fees and expenses relating to registration of each Fund's shares, taxes and governmental fees, fees and expenses of the directors, costs of obtaining insurance, expenses of printing and distributing stockholder materials, organizational expenses and extraordinary expenses, including costs or losses in any litigation. For the fiscal years ended July 31, 1999, July 31, 1998 and July 31, 1997, High Yield Fund's total expenses, stated as a percentage of average net assets, were 1.19%, 1.15% and 1.34%, respectively. For the fiscal period June 26, 1998, through May 31, 1999, total expenses, stated as a percentage of average net assets, were 3.02% for Plus Fund. This figure includes 1.87% related to interest expense for the period June 26, 1998, through May 31, 1999, representing the cost of leverage to Plus Fund. In accordance with procedures adopted by each Fund's Board, brokerage transactions for each Fund are conducted through PaineWebber or its affiliates and each Fund pays fees to PaineWebber for its services as lending agent in each Fund's portfolio securities lending program. Mitchell Hutchins investment personnel may engage in securities transactions for their own accounts pursuant to a code of ethics that establishes procedures for personal investing and restricts certain transactions. The Funds have the same directors and officers. Upon the Reorganization, the directors and officers of Plus Fund will continue as the directors and officers for the combined Fund. Please see Appendix B for the names, ages and principal occupations of the current Board Members and Officers of both Funds. 24 OTHER SERVICE PROVIDERS State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, serves as custodian of both Funds' assets. State Street Bank and Trust Company employs foreign sub-custodians, approved by each Fund's Board of Directors, in accordance with applicable requirements under the 1940 Act, to provide custody of each Fund's foreign assets. PNC Bank, National Association, whose principal business address is 1600 Market Street, Philadelphia, Pennsylvania 19103, is each Fund's transfer and dividend disbursing agent and registrar. The Funds also have the same independent auditor, Ernst & Young LLP, which is located at 787 Seventh Avenue, New York, New York 10019. Upon completion of the Reorganization, these entities will continue to provide services to the combined Fund. FINANCIAL HIGHLIGHTS The following financial highlights table is intended to help you understand the financial performance of High Yield Fund and Plus Fund. Certain information reflects financial results for a single share of each Fund. In the table, "total investment return" represents the rate that an investor would have earned on the investments in High Yield Fund shares and Plus Fund Shares, respectively (assuming reinvestment of all dividends and distributions). The information has been audited (except as noted) by Ernst & Young LLP, the Funds' independent auditors, whose reports, along with the Funds' financial statements, are included in the Funds' Annual Reports to Stockholders. The Annual Reports may be obtained without charge by calling [1-800-647-1568] and are incorporated by reference herein. HIGH YIELD FUND FINANCIAL HIGHLIGHTS Selected data for a share of common stock outstanding throughout each period is presented below:
For the Six Months ended January 31, 2000 For the Years Ended July 31, ------------------------------------------------------------------ (unaudited) 1999 1998 1997 1996 1995 ----------------------- ---- ---- ---- ---- ---- Net asset value, beginning of period.. $11.76 $14.18 $14.30 $13.25 $13.44 $13.76 ------- ------- ------- ------- ------- ------ Net investment income................. 0.61 1.27 1.25 1.29 1.29 1.40 Net realized and unrealized gains (losses) on investments .............. (0.43) (2.43) (0.11) 1.02 (0.16) (0.34) ------ ------ ------ ----- ------ ------ Net increase (decrease) from investment operations................. 0.18 (1.16) 1.14 2.31 1.13 1.06 ------ ------ ----- ----- ----- ---- Dividends from net investment income.. (0.63) (1.26) (1.26) (1.26) (1.32) (1.38) ------ ------ ------ ------ ------ ------ Net asset value, end of period........ $11.31 $11.76 $14.18 $14.30 $13.25 $13.44 ======= ======= ======= ======= ======= ====== Market value, end of period........... $10.56 $11.31 $13.44 $13.94 $12.50 $12.38 ====== ======= ======= ======= ======= ====== Total investment return (1): (0.73)% (6.35)% 5.45% 22.59% 12.16% 11.87% ======== ======= ===== ====== ====== ====== Ratios/Supplemental Data: Net assets, end of period (000's) $68,227 $70,905 $85,525 $86,232 $79,904 $81,081 Expenses to average net assets... 1.29%* 1.19% 1.15% 1.34% 1.25% 1.21% Net investment income to average net assets....................... 10.58%* 10.34% 8.71% 9.39% 9.87% 10.68% Portfolio turnover rate.......... 21% 102% 156% 122% 135% 103%
(1) Total investment return is calculated assuming a purchase of capital stock at market value on the first day of each period reported and a sale at market value on the last day of each period reported and assuming reinvestment of dividends at prices obtained under the Fund's Dividend Reinvestment Plan. Total investment return does not reflect brokerage commissions and has not been annualized. * Annualized 26 PLUS FUND FINANCIAL HIGHLIGHTS Selected data for a share of common stock outstanding throughout each period is presented below: For the Eight For the Period Months ended June 26, 1998+ January 31, 2000 through (unaudited) May 31, 1999 -------------------- ----------------- Net asset value, beginning of period.. $12.31 $15.00 ------ ------ Net investment income................. 1.00 1.42 Net realized and unrealized loss from investment transactions.......... (0.46) (2.83) ------ ------ Net increase (decrease) from investment operations................. 0.54 (1.41) ---- ------ Dividends from net investment income.. (1.00) (1.24) ------ ------ Net asset value, end of period........ $11.85 $12.35 ====== ====== Market value, end of period........... $11.50 $12.31 ====== ====== Total investment return (1): 3.12% (9.37)% ======= ======= Ratios/Supplemental Data: Net assets, end of period (000's) $377,506 $388,929 Expenses to average net assets**. 3.58%* 3.02%* Net investment income to average net assets....................... 12.59%* 11.82%* Portfolio turnover rate.......... 33% 52% Asset Coverage++................. $3,261 $3,682 - -------------------------- + Commencement of operations ++ Per $1,000 of bank loans outstanding * Annualized ** This ratio includes 2.39% and 1.87 % related to interest expense for the eight months ending January 31, 2000 and for the period June 26, 1998 through May 31, 1999, respectively, which represents the cost of leverage to the Fund. (1) Total investment return is calculated assuming a purchase of capital stock at market value on the first day of each period reported and a sale at market value on the last day of each period reported and assuming reinvestment of dividends at prices obtained under the Fund's Dividend Reinvestment Plan. Total investment return does not reflect brokerage commissions and has not been annualized. ADDITIONAL INFORMATION ABOUT THE REORGANIZATION TERMS OF THE REORGANIZATION The terms and conditions under which the Reorganization may be consummated are set forth in the Plan. Significant provisions of the Plan are 27 summarized below; however, this summary is qualified in its entirety by reference to the Plan, a copy of which is attached as Appendix A to this Proxy Statement/Prospectus. The Plan contemplates (a) Plus Fund acquiring on the Closing Date all the assets of High Yield Fund in exchange solely for Plus Fund Shares (and cash in lieu of certain fractional Plus Fund Shares) and Plus Fund's assumption of all of High Yield Fund's liabilities and (b) the distribution of those shares and cash to High Yield Fund stockholders. High Yield Fund's assets include all cash, cash equivalents, securities, receivables (including interest and dividends receivable), claims and rights of action, rights to register shares under applicable securities laws, books and records, deferred and prepaid expenses shown as assets on its books and other property owned by it as of the close of business on the Closing Date ("Effective Time") (collectively, the "Assets"). Plus Fund will assume from High Yield Fund all its liabilities, debts, obligations and duties of whatever kind or nature, whether absolute, accrued, contingent or otherwise, whether or not arising in the ordinary course of business, whether or not determinable at the Effective Time and whether or not referred to in the Plan (collectively, the "Liabilities"); provided, however, that High Yield Fund will use its best efforts to discharge all of its known Liabilities prior to the Effective Time. Plus Fund will deliver its shares (and cash in lieu of certain fractional Plus Fund Shares) to High Yield Fund, which then will be distributed to High Yield Fund's stockholders. The value of the Assets to be acquired and the amount of the Liabilities to be assumed by Plus Fund and the NAV of a share of Plus Fund will be determined as of the close of regular trading on the NYSE on the Closing Date. Portfolio securities normally will be valued based on market values obtained from independent pricing services that use reported last sales prices, current market quotations or valuations from computerized "matrix" systems that derive values based on comparable securities. If a market value is not available from an independent pricing source for a particular security, that security is valued at a fair value determined by or under the direction of the Funds' Boards. The amortized cost method generally will be used to value bonds that will mature in 60 days or less. On, or as soon as practicable after, the Closing Date, High Yield Fund will distribute to its stockholders of record as of the Effective Time the Plus Fund Shares and cash it receives so that each High Yield Fund stockholder will receive full Plus Fund Shares and cash or a fractional share, as appropriate, equal in aggregate NAV to the aggregate NAV of the stockholder's High Yield Fund shares. That distribution will be accomplished by opening accounts on the books of Plus Fund in the names of High Yield Fund's stockholders and crediting those accounts with full Plus Fund Shares and cash or a fractional share, as appropriate, equal in aggregate NAV to the aggregate NAV of the stockholders' High Yield Fund shares. Immediately after the Reorganization, each former stockholder of High Yield Fund will own full Plus Fund Shares and cash or a fractional share, as appropriate, equal in NAV to the aggregate NAV of that stockholder's shares in High Yield Fund immediately prior to the Reorganization. The NAV per share of Plus Fund will not be changed as a result of the Reorganization. Thus, the Reorganization will not result in a dilution of any stockholder ownership interest. 28 DESCRIPTION OF SECURITIES TO BE ISSUED Pursuant to its Articles of Incorporation and Bylaws, Plus Fund may issue up to 200,000,000 shares of capital stock, $0.001 par value, having an aggregate par value of $200,000. Each share of Plus Fund represents an equal proportionate interest with other shares in that Fund. Each share has a par value of $0.001 and equal earnings, assets and voting privileges, except as noted in Plus Fund's SAI. Each share is entitled to dividends and other distributions out of the income earned and gain realized on the assets belonging to the Fund as declared by the Board. Plus Fund Shares entitle their holders to one vote per full share and fractional votes for fractional shares held. Plus Fund Shares are fully paid and non-assessable when issued. DIVIDENDS AND OTHER DISTRIBUTIONS On or before the Closing Date, High Yield Fund will declare and pay as a distribution substantially all of its undistributed net investment income, net capital gain, net short-term capital gain and net gains from foreign currency transactions to maintain its tax treatment as a RIC. The consummation of the Reorganization is subject to a number of conditions set forth in the Plan, some of which may be waived by either Fund. In addition, the Plan may be amended in any mutually agreeable manner, except that no amendment may be made subsequent to the Meeting that would have a material adverse effect on High Yield Fund stockholders' interests. SURRENDER AND EXCHANGE OF HIGH YIELD FUND STOCK CERTIFICATES After the Effective Time, each holder of an outstanding certificate or certificates formerly representing High Yield Fund shares will be entitled to receive, upon surrender of his or her certificate(s), a certificate representing the number of Plus Fund Shares distributable with respect to the holder's High Yield Fund shares. PLEASE DO NOT SEND IN ANY SHARE CERTIFICATES AT THIS TIME. Promptly after the Effective Time, PNC will mail to each holder of certificate(s) formerly representing High Yield Fund shares, instructions and a letter of transmittal for use in surrendering those certificate(s) for a certificate representing Plus Fund Shares. From and after the Effective Time, certificates formerly representing High Yield Fund shares will be deemed for all purposes to evidence ownership of the number of full Plus Fund Shares and either fractional Plus Fund Shares or rights to cash in lieu thereof, as applicable, distributable with respect thereto in the Reorganization, provided that until a holder of such certificate surrenders it, no dividends payable to the holders of record of Plus Fund Shares as of any date subsequent to the Effective Time shall be paid to that holder. Any such dividends will be paid to that holder, without interest, when that holder surrenders those High Yield Fund Share certificate(s) for exchange. From and after the Effective Time, there will be no transfers on the stock transfer books of High Yield Fund. If, after the Effective Time, certificates representing shares of High Yield Fund shares are presented to Plus Fund, they will be canceled and exchanged for certificates representing Plus Fund Shares. 29 ACCOUNTING TREATMENT The Reorganization will be accounted for on a tax-free combined basis. Accordingly, the book cost basis to Plus Fund of the Assets transferred to it by High Yield Fund will be the same as High Yield Fund's book cost basis of the Assets. FEDERAL INCOME TAX CONSIDERATIONS Each Fund will receive an opinion of Kirkpatrick & Lockhart LLP, its counsel, substantially to the following effect: (1) Plus Fund's acquisition of the Assets in exchange solely for full and fractional Plus Fund Shares (plus cash in lieu of certain fractional Plus Fund Shares) and Plus Fund's assumption of the Liabilities, followed by High Yield Fund's distribution of those full Plus Fund Shares PRO RATA to its stockholders those fractional Plus Fund Shares to stockholders that participate in the Dividend Reinvestment Plan and such cash to the remaining stockholders, constructively in exchange for their High Yield Fund shares, will qualify as a reorganization within the meaning of section 368(a)(1)(C) of the Code, and each Fund will be "a party to a reorganization" within the meaning of section 368(b) of the Code; (2) High Yield Fund will recognize no gain or loss on its transfer of the Assets to Plus Fund in exchange solely for Plus Fund Shares (and cash in lieu of fractional Plus Fund Shares) and Plus Fund's assumption of the Liabilities or on the subsequent distribution of those shares and cash to High Yield Fund's stockholders in constructive exchange for their High Yield Fund shares; (3) Plus Fund will recognize no gain or loss on its receipt of the Assets in exchange solely for Plus Fund Shares (plus cash in lieu of certain fractional Plus Fund Shares) and its assumption of the Liabilities; (4) Plus Fund's basis for the Assets will be the same as High Yield Fund's basis therefor immediately before the Reorganization, and Plus Fund's holding period for the Assets will include High Yield Fund's holding period therefor; (5) A High Yield Fund stockholder will recognize no gain or loss on the constructive exchange of all its High Yield Fund shares solely for full Plus Fund Shares and cash or a fractional Plus Fund Share, as appropriate, pursuant to the Reorganization, except with respect to any cash received in lieu of a fractional Plus Fund Share; and (6) A High Yield Fund stockholder's aggregate basis for the Plus Fund Shares to be received by it in the Reorganization will be the same as the aggregate basis for its High Yield Fund shares to be constructively surrendered in exchange for those Plus Fund Shares, decreased by any cash received, and increased by any gain recognized, on the exchange. Its holding period for those Plus Fund Shares will include its holding period for those High Yield Fund shares, provided the stockholder held them as capital assets on the Closing Date. The opinion may state that no opinion is expressed as to the effect of the Reorganization on the Funds or any High Yield Fund stockholder with respect to any asset as to which any unrealized gain or loss is required to be recognized for federal income tax purposes at the end of a taxable year (or on the termination or transfer thereof) under a mark-to-market system of accounting. Utilization by Plus Fund after the Reorganization of any pre-Reorganization capital losses realized by High Yield Fund could be subject to limitation in future years under the Code. 30 Stockholders of High Yield Fund should consult their tax advisers regarding the effect, if any, of the Reorganization in light of their individual circumstances. Because the foregoing discussion only relates to the federal income tax consequences of the Reorganization, those stockholders also should consult their tax advisers as to state and local tax consequences, if any, of the Reorganization. CAPITALIZATION The following table shows the capitalization of High Yield Fund and Plus Fund as of January 31, 2000, and on a PRO FORMA combined basis as of January 31, 2000, giving effect to the Reorganization: PLUS FUND HIGH YIELD FUND PLUS FUND PRO FORMA COMBINED --------------- --------- ------------------ Net Assets $68,227,000 $377,506,000 $445,733,000 Shares Outstanding 6,031,667 31,858,628 37,683,554 Net Asset Value Per Share $11.31 $11.85 $11.85 REQUIRED VOTE. The proposal to approve the Plan requires the affirmative vote of a majority of the votes entitled to be cast on the proposal. THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PLAN OF REORGANIZATION. ---------------------- LEGAL MATTERS Certain legal matters concerning High Yield Fund and Plus Fund and their participation in the Reorganization, the issuance of Plus Fund Shares in connection with the Reorganization and the tax consequences of the Reorganization will be passed upon by Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, counsel to High Yield Fund and Plus Fund. INFORMATION FILED WITH THE SEC AND NYSE This Proxy Statement/Prospectus and the related SAI do not contain all the information set forth in the registration statements and the exhibits relating thereto and annual reports which High Yield Fund and Plus Fund have filed with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933 and the 1940 Act. The SEC file number for High Yield Fund is 811-7804/33-69260. The SEC file number for Plus Fund is 811-08765/333-5107. High Yield Fund and Plus Fund are each subject to the informational requirements of the 1940 Act and the Securities Exchange Act and, in accordance therewith, each files reports and other information with the SEC. Reports, proxy statements, registration statements and other information filed by High Yield Fund and Plus Fund (including the Registration Statement of Plus Fund on Form N-14 of which this Proxy Statement/Prospectus is a part) may be inspected without charge and copied at the public reference facilities maintained by the SEC at Room 1014, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, 31 and at the following regional offices of the SEC: 7 World Trade Center, New York, NY 10048; and 500 West Madison Street, 14th floor, Chicago, IL 60661. Copies of such material may also be obtained from the Public Reference Room of the SEC, Office of Consumer Affairs and Information Services at 450 Fifth Street, N.W., Washington, DC 20549 at the prescribed rates. The SEC maintains an Internet web site at http://www.sec.gov that contains information regarding Plus Fund, High Yield Fund, and other registrants that file electronically with the SEC. High Yield Fund and Plus Fund are listed and publicly traded on the NYSE. If the Reorganization is approved, High Yield Fund will delist from NYSE and deregister as an investment company under the 1940 Act by filing an application on Form N-8F with the SEC upon consummation of the Reorganization. High Yield Fund will also terminate its existence as a Maryland corporation. Reports, proxy statements and other information concerning both Funds may be inspected at the offices of NYSE at 11 Wall Street, New York, New York, 10005. INFORMATION ABOUT THE FUNDS' ADVISER AND ADMINISTRATOR Mitchell Hutchins serves as investment adviser and administrator to both High Yield Fund and Plus Fund. Mitchell Hutchins is located at 51 West 52nd Street, New York, New York 10019-6114. As of January 31, 2000, Mitchell Hutchins was adviser or sub-adviser of 33 investment companies with 76 separate portfolios and aggregate assets of approximately $52.7 billion, including High Yield Fund and Plus Fund, and encompassing a broad range of investment objectives. Mitchell Hutchins is an indirect wholly owned subsidiary of PaineWebber, which in turn is an indirect wholly owned subsidiary of Paine Webber Group, a publicly owned financial services holding company. EXPERTS The audited financial statements of High Yield Fund and Plus Fund incorporated by reference herein and included in High Yield Fund's Annual Report to Stockholders for the fiscal year ended July 31, 1999, and in Plus Fund's Annual Report to Stockholders for the fiscal year ended May 31, 1999, respectively, have each been audited by Ernst & Young LLP, independent auditors, whose reports thereon are included in the Funds' respective Annual Reports to Stockholders. These financial statements have been incorporated herein by reference in reliance on Ernst & Young LLP's reports given on its authority as experts in auditing and accounting. STOCKHOLDER PROPOSALS High Yield Fund will continue to hold annual meetings only if the Reorganization is not approved. If the Reorganization is approved, High Yield Fund will be liquidated. Any stockholder who wishes to submit proposals to be considered at the next annual stockholders' meeting (if held) must submit such proposal to the Fund at 51 West 52nd Street, New York, New York 10019-6114. In order to be considered at that meeting, stockholder proposals must be received by the Fund no later than June 1, 2000 and must satisfy other requirements of the federal securities laws. Plus Fund will continue to hold annual meetings whether or not the Reorganization is approved. Any stockholder who wishes to submit proposals to be considered at the next annual stockholders' meeting must submit such proposal to 32 the Fund at 51 West 52nd Street, New York, New York 10019-6114. In order to be considered at that meeting, stockholder proposals must be received by the Fund no later than March 30, 2000 and must satisfy other requirements of the federal securities laws. ADDITIONAL INFORMATION ABOUT BOTH FUNDS PORTFOLIO SECURITIES The following summarizes some of the characteristics of securities in which the Funds may invest. See the SAI for more information. DEBT OBLIGATIONS; LOWER-RATED SECURITIES. The lower-rated securities in which the Funds may invest are debt obligations, including bonds, debentures, notes, corporate loans and similar instruments and securities, and are generally unsecured. Mortgage and asset-backed securities are types of debt obligations, and income-producing, non-convertible preferred stocks may be treated as debt obligations for the Fund's investment purposes. Debt obligations are used by private and public issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Debt obligations are subject to varying degrees of risk of loss, and the prices (I.E., market values) of debt obligations fluctuate to varying degrees in response to changes in market interest rates. Investments in lower-rated securities are subject to a greater price volatility and a greater risk of loss than higher-rated investments and are considered by Rating Agencies to be predominantly speculative, with limited protection of interest and principal payments. The lower-rated securities in which the Funds may invest include securities that are in default or that face the risk of default with respect to payments of principal or interest. Lower-rated securities generally offer a higher current yield than that available from higher-rated issues. However, lower-rated securities are subject to higher risks in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to negative publicity or investor perceptions. During periods of economic downturn, issuers of lower-rated income securities, especially highly leveraged issuers, may experience financial stress that could adversely affect their ability to make payments of principal and interest and increase the possibility of default. In addition, such issuers may not have more traditional methods of financing available to them, and they may be unable to repay debt at maturity by refinancing. The risk of loss due to payment defaults by these issuers is significantly greater because lower-rated securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. In order for a Fund to enforce its rights in the event of a default on lower-rated securities, the Fund may be required to take possession of and manage collateral securing the issuer's obligations. This may increase the Fund's operating expenses and adversely affect the Fund's net asset value. The Funds may also be limited in their ability to enforce their rights and may incur greater costs in enforcing their rights in the event an issuer becomes the subject of bankruptcy proceedings. In addition, the Funds may be required to participate in a restructuring of the obligation. 33 The Funds are also subject to significant uncertainty as to when, in what manner and for what value the obligations evidenced by securities of bankrupt issuers will eventually be satisfied (e.g., through a liquidation of the obligor's assets, an exchange offer or plan of reorganization involving these securities or a payment of some amount in satisfaction of the obligation). If the Funds participate in negotiations of any exchange offer or plan of reorganization with respect to the issuer of these securities, the Funds may be restricted from disposing of the securities that they hold until the exchange offer or reorganization of the bankrupt issuer is completed. In addition, even if an exchange offer is made or plan of reorganization is adopted for these bankrupt issuers, securities or other assets received by the Funds as a part of an exchange offer or plan of reorganization may have a lower value or income potential than may have been anticipated when the investment was made. Moreover, any securities that the Funds receive upon completion of an exchange offer or plan of reorganization may be restricted as to resale. Some or all of the securities in which the Funds may invest may, when purchased, be illiquid or may subsequently become illiquid. In many cases, lower-rated income securities may be purchased in private placements and, accordingly, will be subject to restrictions on resale as a matter of contract or under the securities laws. It may be more difficult to determine the fair value of such securities for purposes of computing a Fund's NAV. Like higher-rated income securities, lower-rated income securities generally are purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in the lower-rated income securities market, and that market may be less liquid than the market for higher-rated income securities, even under normal economic conditions. As a result, during periods of high demand in the lower-rated securities market, it may be difficult to acquire lower-rated securities that are appropriate for investment by the Funds. Adverse economic conditions and investor perceptions thereof (whether or not based on economic reality) may impair liquidity in the lower-rated securities market and may cause the prices that the Funds receive for its lower-rated income securities to be reduced. In addition, the Funds may experience difficulty in liquidating a portion of their portfolios when necessary to meet the Funds' liquidity needs or in response to a specific economic event, such as deterioration in the creditworthiness of the issuers. Under such conditions, judgment may play a greater role in valuing certain of the Funds' portfolio instruments than in the case of instruments trading in a more liquid market. CORPORATE LOANS. The Funds may invest in loans extended to corporate borrowers by commercial banks and other financial institutions ("Corporate Loans"). As in the case of other lower-rated securities, such Corporate Loans can be expected to provide higher yields than lower-yielding, higher-rated fixed income securities, but they may be subject to greater risk of loss of principal 33-A and interest. There are, however, some significant differences between Corporate Loans and other lower-rated securities. Corporate Loan obligations are frequently secured by collateral pledged by the borrower, and investors in Corporate Loans frequently benefit from debt service subordination provisions imposed on the borrower's bondholders. These arrangements are designed to give Corporate Loan investors preferential treatment (at least with respect to the collateral) over other creditors of the borrower in the event of its insolvency. Even when these arrangements exist, however, there can be no assurance that the principal and interest owed on the Corporate Loans will be repaid in full or that the holders of such Corporate Loans will not experience delays in receiving payment. Corporate Loans generally bear interest at variable rates that are set at a specified "spread" above a base lending rate, such as the prime rate of a U.S. bank, which may fluctuate on a day-to-day basis, or above an established index, such as the London Interbank Offered Rate ("LIBOR"), which is adjusted at set intervals (typically 30 days, but generally not more than one year). Consequently, the value of Corporate Loans held by the Funds may be expected to fluctuate less in response to changes in market interest rates than would fixed-rate securities. However, the secondary market for Corporate Loans is not as well developed as the secondary market for other lower-rated securities, and reliable valuation information about Corporate Loans may be harder to obtain. Therefore, a Fund may have difficulty liquidating and valuing the Corporate Loans that it holds. Generally, Corporate Loans are originated through a lending syndicate in which a bank acts as an administrative agent on behalf of the other lenders to negotiate the loan terms and assumes certain loan servicing responsibilities. The Funds' investments in Corporate Loans normally are through assignments of or participations in all or a portion of another lender's interest in a Corporate Loan. Participations typically result in the Funds having a contractual relationship only with the lender, not with the borrower. In a participation, the Funds are entitled to receive agreed-upon portions of payments of principal, interest and any loan fees by the lender only when and if those payments are received. Also, the Funds might not directly benefit from any collateral supporting the Corporate Loan. As a result, the Funds assume the credit risk of both the borrower and the lender that sold the participation. If the lender becomes insolvent, the Funds might be treated as a general creditor of the lender and might not benefit from any set-off between the lender and the borrower. In an assignment, the Funds are entitled to receive payments directly from the borrower and, therefore, do not depend on the assigning lender to pass those payments on to the Funds. However, in an assignment, the Funds may have greater direct responsibilities with respect to collection of principal and interest and the enforcement of its rights. EQUITY SECURITIES. High Yield Fund may acquire equity securities (including common stocks, rights and warrants for equity and debt securities) only when they are attached to debt securities or as part of a unit including debt securities, or in connection with a conversion or exchange of debt securities. Plus Fund may invest in these equity securities as well as in equity securities of lower-rated or comparable issuers (issuers whose debt securities are lower-rated or who Mitchell Hutchins determines to be of comparable quality). These equity securities may include common and preferred stocks and securities that are convertible into them, including common stock purchase warrants and rights, equity interests in trusts, partnerships, joint ventures or similar enterprises and depository receipts. Common stocks represent an ownership interest in a company. Preferred stock has certain fixed-income features, like debt securities, but is actually equity in a company. The prices of equity securities generally fluctuate more than debt securities and reflect changes in a company's financial condition and in overall market and economic conditions. Common stocks generally represent the riskiest investment in a company. 34 Warrants are securities permitting, but not obligating, their holder to subscribe for other securities. Warrants do not carry with them the right to dividends or voting rights with respect to the securities that they entitle their holder to purchase, and they do not represent any rights in the assets of the issuer. As a result, warrants may be considered more speculative than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to its expiration date. OTHER INVESTMENT PRACTICES The Funds may engage in the following investment practices, each of which may involve certain risks. LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 33 1/3% of its total assets to broker-dealers or institutional investors that Mitchell Hutchins deems qualified, but only when the borrower maintains acceptable collateral with the Funds' custodian bank in an amount, marked to market daily, at least equal to the market value of the securities loaned, plus accrued interest and dividends. Acceptable collateral is limited to cash, U.S. government securities and irrevocable letters of credit that meet certain guidelines established by Mitchell Hutchins. Each Fund may reinvest any cash collateral in money market investments or other short-term liquid investments, including shares of other investment companies. In determining whether to lend securities to a particular broker-dealer or institutional investor, Mitchell Hutchins considers, and during the period of the loan monitors, relevant facts and circumstances, including the creditworthiness of the borrower. Each Fund retains authority to terminate any of its loans at any time. Each Fund may pay reasonable fees in connection with a loan and may pay the borrower or a placing broker a negotiated portion of the interest earned on the reinvestment of cash held as collateral. Each Fund receives amounts equivalent to any dividends, interest or other distributions on the securities loaned. Each Fund will regain record ownership of loaned securities to exercise beneficial rights, such as voting and subscription rights, when regaining such rights is considered to be in each Fund's interest. Pursuant to procedures adopted by each Fund's Board of Directors governing each Fund's securities lending program, PaineWebber has been retained to serve as lending agent for each Fund. Each Board has also authorized the payment of fees, calculated as a percentage of each Fund's securities lending revenues, to PaineWebber for these services. Each Board periodically reviews the portfolio securities loan transactions for which PaineWebber acts as lending agent. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase debt securities on a "when-issued" basis or may purchase or sell debt securities on a "delayed delivery" basis, i.e., for issuance or delivery to the Fund later than the normal settlement date for such securities at a stated price and yield. The Funds generally do not pay for such securities or start earning interest on them until they are received. However, when a Fund undertakes a when-issued or delayed delivery obligation, it immediately assumes the risks of ownership, including the risk of price fluctuation. When a Fund agrees to purchase securities on a when-issued or delayed delivery basis, its custodian sets aside in a segregated account, cash or liquid securities, marked-to-market daily, in an amount at least equal to the amount of the commitment. Failure of the issuer to deliver a security purchased by a Fund on a when-issued or delayed delivery basis may result in the Fund's incurring a loss or missing an opportunity to make an alternative investment. Depending on market conditions, a Fund's when- 35 issued and delayed delivery purchase commitments could cause its NAV per share to be more volatile, because such securities may increase the amount by which the Fund's total assets, including the value of when-issued and delayed delivery securities held by the Fund, exceed its net assets. FORWARD COMMITMENTS. Each Fund may make contracts to purchase securities for a fixed price at a future date beyond the customary settlement time ("forward commitments") without its doing so being considered leverage if it holds, and maintains until the settlement date in a segregated account, cash or liquid securities in an amount sufficient to meet the purchase price, or if it enters into offsetting contracts for the forward sale of other securities that it owns. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. This risk is in addition to the risk of decline in value of the Fund's other assets. Where such purchases are made through dealers, a Fund relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Fund of an advantageous yield or price. Although a Fund will generally enter into forward commitments with the intention of acquiring portfolio securities, each Fund may dispose of a commitment prior to settlement if Mitchell Hutchins deems it appropriate to do so. Each Fund may realize short-term capital gains or losses upon the sale of forward commitments. REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements. Repurchase agreements are transactions in which a Fund purchases securities and simultaneously commits to resell the securities to the seller at an agreed-upon date or upon demand and at a price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities. Although repurchase agreements carry certain risks not associated with direct investments in securities, including possible decline in the market value of the underlying securities and delays and costs to a Fund if the other party to the repurchase agreement becomes bankrupt, the Fund enters into repurchase agreements only with banks, securities dealers or their respective affiliates in transactions believed by Mitchell Hutchins to present minimum credit risks in accordance with guidelines established by the Fund's Board of Directors. ILLIQUID SECURITIES. Some or all of the securities in which each Fund invests may, when purchased, be illiquid or may subsequently become illiquid. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which a Fund has valued the securities and includes, among other things, purchased over-the-counter ("OTC") options, repurchase agreements maturing in more than seven days, certain loan participations and assignments, and restricted securities other than those Mitchell Hutchins has determined are liquid pursuant to guidelines established by the Fund's Board of Directors. To the extent a Fund invests in illiquid securities, the Fund may not be able to readily liquidate such investments, and would have to sell other investments if necessary to raise cash to meet its obligations. Each Board of Directors has delegated the function of making day-to-day determinations of liquidity to Mitchell Hutchins pursuant to guidelines approved by each Board. Mitchell Hutchins will take into account a number of factors in reaching liquidity decisions, including (1) the frequency of trades for the security, (2) the number of dealers that make quotes for the security, (3) the number of dealers that have undertaken to make a market in the security, (4) the number of other potential purchasers for the security and (5) the nature of the security and how trading is effected (e.g., the time needed to sell the 36 security, how bids are solicited, and the mechanics of transfer). Mitchell Hutchins will monitor the liquidity of restricted securities in each Fund's portfolio and report periodically on such decisions to each Board of Directors. HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Fund may attempt to reduce the overall risk of its investments (hedge) by using options, futures contracts, options on futures contracts, forward currency contracts and interest rate swap transactions and may use options (both exchange-traded and OTC), futures contracts, options on futures contracts and forward currency contracts to attempt to enhance income, realize gains or manage the Fund's foreign currency exposure. A Fund's ability to use these derivative instruments may be limited by market conditions, regulatory limits and tax considerations. The SAI contains further information on these derivative instruments. Each Fund may enter into forward currency contracts, buy and sell foreign currency, debt and equity security index and interest rate futures contracts, write covered put and call options and buy and sell put and call options on securities, debt and equity security indices, foreign currencies and such futures contracts. A Fund may enter into options, futures, forward currency contracts and swap transactions that approximate (but do not exceed) the full value of its portfolio, at which point up to 100% of the Fund's portfolio assets would be subject to the risks associated with the use of these instruments. Each Fund may enter into swap transactions, including interest rate swaps and interest rate caps, floors and collars, for hedging or other risk management purposes. For example, a Fund may enter into interest rate swap transactions to preserve a return or spread on a particular investment or portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund will enter into swap transactions only with banks and recognized securities dealers or their respective affiliates that are believed by Mitchell Hutchins to present minimal credit risks in accordance with guidelines established by the Fund's Board of Directors. Each Fund might not employ any of the derivative instruments or strategies described above, and there can be no assurance that any derivative instrument or strategy used will succeed. If Mitchell Hutchins incorrectly forecasts interest rates, currency exchange rates, market values or other economic factors in utilizing a derivative instrument for a Fund, the Fund might have been in a better position had it not hedged at all. The use of derivative instruments and strategies involves certain special risks, including (1) the fact that skills needed to use derivative instruments are different from those needed to select a Fund's securities, (2) possible imperfect correlation, or even no correlation, between price movements of these derivative instruments and price movements of the investments being hedged, (3) the fact that, while derivative instruments and strategies can reduce the risk of loss, they can also reduce the opportunity for gain, or even result in losses, by offsetting favorable price movements in hedged investments and (4) the possible inability of a Fund to purchase or sell a portfolio security at a time that otherwise would be favorable for it to do so, or the possible need for a Fund to sell a portfolio security at a disadvantageous time, due to the need for the Fund to maintain "cover" or to segregate securities in connection with derivative instruments and the possible inability of the Fund to close out or to liquidate its hedged position. 37 New financial products and risk management techniques continue to be developed. Each Fund may use these new products and techniques to the extent consistent with its investment objectives and with regulatory and federal tax considerations. TEMPORARY AND DEFENSIVE STRATEGIES AND BORROWINGS Each Fund may implement various temporary or defensive strategies at times when Mitchell Hutchins determines that conditions in the markets make pursuing the Fund's basic investment strategy inconsistent with the best interests of its stockholders. When unusual market or economic conditions occur, Plus Fund may, for temporary defensive purposes, invest up to 100% of its total assets or, for liquidity purposes, invest up to 35% of its total assets, in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, certificates of deposit, bankers' acceptances or other bank obligations, commercial paper or other income securities deemed by Mitchell Hutchins to be consistent with a defensive posture, or it may hold cash. At such times, Mitchell Hutchins may temporarily implement various alternative strategies for High Yield Fund, designed primarily to reduce fluctuations in the value of the Fund's assets. In implementing these "defensive" strategies, High Yield Fund may invest in money market instruments of all types and higher-quality debt securities. These strategies may include an increase in the portion of the Funds' assets invested in higher-quality debt securities, which generally have lower yields than do lower-rated securities. In addition to its authority to use leverage up to an amount equal to 33 1/3% of its total assets (including the amount of leverage), Plus Fund may borrow money for temporary or emergency purposes (e.g., settlement and clearance of securities transactions and payments of dividends to common or any preferred stockholders) in an amount not exceeding 5% of the value of the Fund's total assets (not including the amount borrowed for this purpose). High Yield Fund also may borrow money for temporary or emergency purposes (e.g., clearance of transactions or payments of dividends to stockholders) in an amount not exceeding 10% of the value of the Fund's total assets (not including the amount borrowed). CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION Each Fund presently has provisions in its Articles of Incorporation that have the effect of limiting (1) the ability of other entities or persons to acquire control of the Fund, (2) the Fund's freedom to engage in certain transactions, and (3) the ability of the Fund's directors or stockholders to amend the Articles of Incorporation. These provisions of the Articles of Incorporation may be regarded as "anti-takeover" provisions. Under Maryland law and each Fund's Articles of Incorporation, the affirmative vote of the holders of at least a majority of the votes entitled to be cast is required for the consolidation of the Fund with another corporation, a merger of the Fund with or into another corporation (except for certain mergers in which the Fund is the successor), a statutory share exchange in which the Fund is not the successor, a sale or transfer of all or substantially all of the Fund's assets, the dissolution of the Fund and any amendment to the Fund's Articles of Incorporation. In addition, the affirmative vote of the holders of at least 66 2/3% (which is higher than that required under Maryland law or the 1940 Act) of the outstanding shares of a Fund's capital stock is required generally to authorize any of the following transactions or to amend the provisions of the Articles of Incorporation relating to such transactions: 38 (1) merger, consolidation or statutory share exchange of the Fund with or into any other corporation; (2) issuance of any securities of the Fund to any person or entity for cash; (3) sale, lease or exchange of all or any substantial part of the assets of the Fund to any entity or person (except assets having an aggregate market value of less than $l,000,000); or (4) sale, lease or exchange to the Fund, in exchange for securities of the Fund, of any assets of any entity or person (except assets having an aggregate fair market value of less than $1,000,000) if such corporation, person or entity is directly, or indirectly through affiliates, the beneficial owner of more than 5% of the outstanding shares of each Fund (a "Principal Stockholder"). A similar vote also would be required for any amendment of the Articles of Incorporation to convert a Fund to an open-end investment company by making any class of each Fund's capital stock a "redeemable security," as that term is defined in the 1940 Act. Such vote would not be required with respect to any of the foregoing transactions, however, when, under certain conditions, the Board of Directors approves the transaction, although in certain cases involving merger, consolidation or statutory share exchange or sale of all or substantially all of the Fund's assets or the conversion of the Fund to an open-end investment company, the affirmative vote of the holders of a majority of the outstanding shares of the Fund's capital stock would nevertheless be required. Reference is made to the Articles of Incorporation of each Fund, on file with the SEC, for the full text of these provisions. The provisions of the Articles of Incorporation described above and each Fund's right to repurchase or make a tender offer for its shares could have the effect of depriving the stockholders of opportunities to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of each Fund in a tender offer or similar transaction. See "Additional Information About Both Funds-Stock Repurchases and Tender Offers." The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a Principal Stockholder. They provide, however, the advantage of potentially requiring persons seeking control of a Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's management, investment objective and policies. Each Fund's Board of Directors has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its stockholders. DESCRIPTION OF CAPITAL STOCK Plus Fund is authorized to issue 200 million shares of capital stock, $0.001 par value. High Yield Fund is authorized to issue 100 million shares of capital stock, $0.001 par value, all of which currently is classified as common stock. The Board of Directors of each Fund is authorized to classify and reclassify any unissued shares of capital stock from time to time by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or terms and conditions of redemption of such shares by the Fund. The information contained under this heading is subject to the provisions contained in each Fund's Articles of Incorporation and Bylaws. 39 COMMON STOCK. Each Fund's shares of common stock have no preemptive, conversion, exchange or redemption rights. Each share has equal voting, dividend, distribution and liquidation rights. The outstanding shares of common stock are fully paid and non-assessable. Stockholders are entitled to one vote per share, with fractional votes for fractional shares. All voting rights for the election of directors are non-cumulative, which means that the holders of more than 50% of the shares can elect 100% of the directors then nominated for election if they choose to do so and, in such event, the holders of the remaining shares will not be able to elect any directors. Under the rules of the NYSE applicable to listed companies, each Fund normally is required to hold an annual meeting of stockholders in each year. If a Fund is converted to an open-end investment company or if for any other reason the Fund's shares are no longer listed on the NYSE (or any other national securities exchange the rules of which require annual meetings of stockholders), the Fund may decide not to hold annual meetings of stockholders. Any additional offerings of the common stock, if made, will require approval of the relevant Fund's Board of Directors and will be subject to the requirement of the 1940 Act that shares may not be sold at a price below the then current net asset value, exclusive of underwriting discounts and commissions, except, among other things, in connection with an offering to existing stockholders or with the consent of a majority of the holders of the Fund's outstanding voting securities. The following chart indicates the shares of the common stock outstanding for each Fund as of January 31, 2000:
Amount Outstanding Amount Held by Exclusive of Amount Registrant or for Its Held by Registrant or Fund Title of Class Amount Authorized Account for Its Account ---- -------------- ----------------- -------- --------------- Plus Fund Common Stock 200,000,000 0 31,858,628 High Yield Fund Common Stock 100,000,000 0 6,031,667
STOCK REPURCHASES AND TENDER OFFERS. In recognition of the possibility that the common stock might trade at a discount from NAV and that any such discount may not be in the best interest of stockholders, each Fund's Board of Directors has determined that it will from time to time consider taking action to attempt to reduce or eliminate any discount. To that end, each Board may, in consultation with Mitchell Hutchins, from time to time consider action either to repurchase Fund shares in the open market or to make a tender offer for Fund shares at their NAV. Each Board currently intends at least annually to consider making such open market repurchases or tender offers and at such time may consider such factors as the market price of the Fund's shares, the NAV of the shares, the liquidity of the assets of the Fund, whether such transactions would impair the Fund's status as a RIC or result in a failure to comply with applicable asset coverage requirements, general economic conditions and such other events or conditions that may have a material effect on the Fund's ability to consummate such transactions. Under certain circumstances, it is possible that open market repurchases or tender offers may constitute distributions under the Code to the remaining stockholders of the Fund. Each Board may at any time, however, decide that the Fund should not repurchase shares or make a tender offer. Each Fund may borrow to finance repurchases and tender offers. Interest on such borrowings will reduce the Fund's net income. 40 There is no assurance that repurchases or tender offers will result in Fund shares trading at a price that is equal or close to its net asset value per share. The market price of a Fund's shares will be determined by, among other things, the relative demand for and supply of such shares in the market, each Fund's investment performance, each Fund's dividends and yield and investor perception of each Fund's overall attractiveness as an investment as compared with other investment alternatives. Nevertheless, the fact that each Fund's shares may be the subject of tender offers at NAV from time to time may reduce the spread that might otherwise exist between the market price of the common stock and NAV per share. In the opinion of Mitchell Hutchins, sellers may be less inclined to accept a significant discount if they have a reasonable expectation of being able to recover NAV in conjunction with a possible tender offer. Although each Board of Directors believes that stock repurchases and tender offers generally would have a favorable effect on the market price of the common stock, it should be recognized that a Fund's acquisition of shares of the common stock would decrease each Fund's total assets and, therefore, have the effect of increasing each Fund's expense ratio. In addition, such acquisition would have the effect of decreasing asset coverage with respect to any leverage being used by Plus Fund. Because of the nature of each Fund's investment objective, policies and portfolio, under current market conditions, Mitchell Hutchins anticipates that repurchases and tender offers generally should not have a material, adverse effect on a Fund's investment performance and that Mitchell Hutchins generally should not have any material difficulty in disposing of portfolio securities in order to consummate stock repurchases and tender offers; however, this may not always be the case. Any tender offer made by a Fund for shares of the common stock generally would be at a price equal to the NAV of the shares on a date subsequent to the Fund's receipt of all tenders. Each offer would be made, and the stockholders would be notified, in accordance with the requirements of the Exchange Act and the 1940 Act, either by publication or mailing or both. Each offering document would contain such information as is prescribed by such laws and the rules and regulations promulgated thereunder. Each person tendering shares would pay to the Fund's Transfer Agent a service charge to help defray certain costs, including the processing of tender forms, effecting payment, postage and handling. Any such service charge would be paid directly by the tendering stockholder and would not be deducted from the proceeds of the purchase. The Fund's Transfer Agent would receive the fee as an offset to these costs. The Fund expects that the costs of effecting a tender offer would exceed the aggregate of all service charges received from those who tender their shares. Costs associated with the tender would be charged against capital. Tendered shares of common stock that have been accepted and purchased by a Fund will be held in the Fund's treasury until retired by a Board of Directors. If tendered shares are not retired, the Fund may hold, sell or otherwise dispose of the shares for any lawful corporate purpose as determined by each Board. CONVERSION TO OPEN-END INVESTMENT COMPANY. Each Fund's Board of Directors will consider from time to time whether it would be in the best interests of the Fund and its stockholders to convert the Fund to an open-end investment company. If a Board of Directors determines that such a conversion would be in the best interests of the Fund and its stockholders and is consistent with the 1940 Act, the Board will submit to the Fund's stockholders, 41 at the next succeeding annual or special meeting, a proposal to amend the Fund's Articles of Incorporation to so convert the Fund. Such amendment would provide that, upon its adoption by the holders of at least a majority of the Fund's outstanding shares entitled to vote thereon, the Fund would convert from a closed-end to an open-end investment company. If a Fund converted to an open-end investment company, it would be able to continuously issue and offer for sale shares of common stock, and each such share could be presented to the Fund at the option of the holder thereof for redemption at a price based on the then current NAV per share. In such event, the Fund could be required to liquidate portfolio securities to meet requests for redemption, the common stock would no longer be listed on the NYSE and certain investment policies of each Fund would require amendment. Plus Fund would also be required to redeem any outstanding preferred stock and any indebtedness not constituting bank loans, which could eliminate or alter Plus Fund's leveraged capital structure. In considering whether to propose that a Fund convert to an open-end investment company, the relevant Board of Directors will consider various factors, including, without limitation, the potential benefits and detriments to the Fund and its stockholders of conversion, the potential alternatives and the benefits and detriments associated therewith, and the feasibility of conversion given, among other things, the Fund's investment objective and policies. In the event of a conversion to an open-end investment company, a Fund may charge fees in connection with the sale or redemption of its shares. There can be no assurance that either Board will conclude that such a conversion is in the best interest of the Fund or its stockholders. As an open-end investment company, a Fund may reserve the right to honor any request for redemption by making payment in whole or in part in securities chosen by the Fund and valued in the same way as they would be valued for purposes of computing the Fund's NAV. If payment is made in securities, a stockholder may incur brokerage expenses in converting these securities into cash. TAXATION Each Fund intends to continue to qualify for treatment as a RIC. For each taxable year that a Fund so qualifies, the Fund (but not its stockholders) will be relieved of federal income tax on the part of its investment company taxable income (consisting generally of net investment income, net short-term capital gain and net gains from certain foreign currency transactions) and net capital gain that it distributes to its stockholders. Dividends from a Fund's investment company taxable income (whether received in cash or reinvested in additional Fund shares) generally are taxable to stockholders as ordinary income to the extent of the Fund's earnings and profits. Distributions of a Fund's net capital gain (whether received in cash or reinvested in additional Fund shares) are taxable to stockholders as long-term capital gain, regardless of how long they have held their Fund shares. A participant in either Reinvestment Plan will be treated as having received a distribution in the amount of the cash used to purchase Fund shares on his or her behalf, including a PRO RATA portion of the brokerage fees incurred by the Transfer Agent. Distributions by a Fund to stockholders in any year that exceed its earnings and profits generally may be applied by each stockholder against his or her basis for Fund shares and will be taxable to any stockholder only to the extent the distributions to the stockholder exceed 42 the stockholder's basis for his or her Fund shares. An investor should be aware that, if Fund shares are purchased shortly before the record date for any dividend or other distribution, the investor will pay full price for the shares and receive some portion of the price back as a taxable distribution. Stockholders who are not liable for tax on their income and whose shares are not debt-financed are not required to pay tax on dividends or other distributions they receive from the Funds. Each Fund notifies its stockholders following the end of each calendar year of the amounts of dividends and capital gain distributions it paid (or deemed paid) that year. Upon a sale or exchange of Fund shares (including a sale pursuant to a share repurchase or tender offer by a Fund), a stockholder generally will recognize a taxable gain or loss equal to the difference between his or her adjusted basis for the shares and the amount realized. Any such gain or loss (1) will be treated as a capital gain or loss if the shares are capital assets in the stockholder's hands and (2) if the shares have been held for more than one year, will be long-term capital gain or loss; provided that any loss realized on a sale or exchange of Fund shares that were held for six months or less will be treated as a long-term, rather than as a short-term, capital loss to the extent of any capital gain distributions received thereon. A loss realized on a sale or exchange of Fund shares will be disallowed to the extent those shares are replaced by other Fund shares within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the shares (which could occur, for example, as the result of participation in a Reinvestment Plan). In that event, the basis of the replacement shares will be adjusted to reflect the disallowed loss. Each Fund may acquire zero coupon or other securities issued with original issue discount ("OID"). As holders of such securities, a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on it during the year. A Fund also must include in gross income each year any "interest" distributed in the form of additional securities on payment-in-kind securities. Because each Fund annually must distribute substantially all of its investment company taxable income, including any accrued OID and other non-cash income, to satisfy the distribution requirement imposed on RICs and to avoid imposition of a 4% excise tax (see "Taxation" in the SAI), a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. Those distributions will be made from the Funds' cash assets or from the proceeds of sales of portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease their investment company taxable income and/or net capital gain. Each Fund is required to withhold 31% of all dividends, capital gain distributions and repurchase proceeds payable to any individuals and certain other noncorporate stockholders who do not provide the Fund with a correct 43 taxpayer identification number. Each Fund is also required to withhold 31% of all dividends and capital gain distributions payable to those stockholders who otherwise are subject to backup withholding. The foregoing is only a summary of some of the important federal tax considerations generally affecting the Funds and their stockholders. There may be other federal, state or local tax considerations applicable to a particular stockholder. Stockholders are urged to consult their tax advisers. 44 APPENDIX A FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is made as of _______, 2000, between Managed High Yield Plus Fund Inc. ("Acquiring Fund") and Managed High Yield Fund Inc. ("Target"), both Maryland corporations. (Acquiring Fund and Target are sometimes referred to herein individually as a "Fund" and collectively as the "Funds.") The Funds desire to effect a reorganization described in section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"), and intend this Agreement to be, and adopt it as, a "plan of reorganization" within the meaning of the regulations under section 368 of the Code ("Regulations"). The reorganization will involve the transfer to Acquiring Fund of Target's assets in exchange solely for voting shares of common stock in Acquiring Fund, par value $0.001 per share ("Acquiring Fund Shares"), and the assumption by Acquiring Fund of Target's liabilities, followed by the constructive distribution of the Acquiring Fund Shares PRO RATA to the holders of shares of common stock in Target ("Target Shares") in exchange therefor, all on the terms and conditions set forth herein. The foregoing transactions are referred to herein collectively as the "Reorganization." Each Fund is a closed-end fund with a single class of shares that are currently purchased and sold on the New York Stock Exchange ("NYSE"). In consideration of the mutual promises contained herein, the parties agree as follows: 1. PLAN OF REORGANIZATION AND TERMINATION 1.1. Target agrees to assign, sell, convey, transfer, and deliver all of its assets described in paragraph 1.2("Assets") to Acquiring Fund. Acquiring Fund agrees in exchange therefor - (a) to issue and deliver to Target the number of full Acquiring Fund Shares (plus fractional Acquiring Fund shares (rounded to the third decimal place) for Stockholders (as defined in paragraph 1.5) that at the Effective Time (as defined in paragraph 3.1), participate in Target's Dividend Reinvestment Plan ("DRP Stockholders") and cash in lieu of any fractional shares with respect to Stockholders that are not DRP Stockholders), determined by dividing the net value of Target (computed as set forth in paragraph 2.1) by the net asset value ("NAV") of an Acquiring Fund Share (computed as set forth in paragraph 2.2), and (b) to assume all of Target's liabilities described in paragraph 1.3 ("Liabilities"). Such transactions shall take place at the Closing (as defined in paragraph 3.1). 1.2. The Assets shall include, without limitation, all cash, cash equivalents, securities, receivables (including interest and dividends receivable), claims and rights of action, rights to register shares under applicable securities laws, books and records, deferred and prepaid expenses shown as assets on Target's books, and other property owned by Target at the Effective Time. 1.3. The Liabilities shall include (except as otherwise provided herein) all of Target's liabilities, debts, obligations, and duties of whatever kind or nature, whether absolute, accrued, contingent, or otherwise, whether or not arising in the ordinary course of business, whether or not determinable at the Effective Time, and whether or not specifically referred to in this Agreement. Notwithstanding the foregoing, Target agrees to use its best efforts to discharge all its known Liabilities before the Effective Time. 1.4. At or immediately before the Effective Time, Target shall declare and pay to its stockholders a dividend and/or other distribution in an amount large enough so that it will have distributed substantially all (and in any event not less than 90%) of its investment company taxable income (computed without regard to any deduction for dividends paid) and substantially all of its realized net capital gain, if any, for its current taxable year through the Effective Time. 1.5. At the Effective Time (or as soon thereafter as is reasonably practicable), Target shall distribute the Acquiring Fund Shares and cash it receives pursuant to paragraph 1.1 to its stockholders of record, determined as of the Effective Time (each a "Stockholder" and collectively "Stockholders"), in constructive exchange for their Target Shares. Such distribution shall be accomplished by Acquiring Fund's transfer agent's opening accounts on Acquiring Fund's share transfer books in the Stockholders' names and transferring such Acquiring Fund Shares thereto. Each Stockholder's account shall be credited with the respective PRO RATA number of full Acquiring Fund Shares (plus fractional Acquiring Fund shares (rounded to the third decimal point) for DRP Stockholders and cash in lieu of any fractional Acquiring Fund Shares for all other Stockholders) due that Stockholder. All outstanding Target Shares, including any represented by certificates, shall simultaneously be canceled on Target's share transfer books. 1.6. Acquiring Fund shall not issue certificates representing Acquiring Fund Shares in connection with such distribution. After the Effective Time, each holder of an outstanding certificate or certificates formerly representing Target shares ("Old Certificate(s)") will be entitled to receive, upon surrender of his or her Old Certificate(s), a certificate representing the Acquiring Fund Shares distributable with respect to such holder's Target Shares. Promptly after the Effective Time, the Transfer Agent shall mail to each holder of Old Certificate(s) instructions and a letter of transmittal for use in surrendering those certificate(s) for a certificate representing the Acquiring Fund Shares and cash in lieu of any fractional Acquiring Fund Shares if appropriate. Although from and after the Effective Time, Old Certificates will be deemed for all purposes to evidence ownership of Acquiring Fund Shares distributable with respect thereto in the Reorganization, until a holder of Old Certificate(s) surrenders them, no dividends payable to the holders of record of Acquiring Fund Shares as of any date subsequent to the Effective Time shall be paid to such holder. If, after the Effective Time, Old Certificates are presented to Acquiring Fund, such certificates will be canceled and exchanged for certificates representing the number of distributable Acquiring Fund shares with respect thereto in the Reorganization. 1.7. As soon as reasonably practicable after distribution of the Acquiring Fund Shares pursuant to paragraph 1.5, but in all events within twelve months after the Effective Time, Target shall be terminated and any further actions shall be taken in connection therewith as required by applicable law. 1.8. Any reporting responsibility of Target to a public authority is and shall remain its responsibility up to and including the date on which it is terminated. 1.9. Any transfer taxes payable on issuance of Acquiring Fund Shares in a name other than that of the registered holder on Target's books of the Target Shares constructively exchanged therefor shall be paid by the person to whom such Acquiring Fund Shares are to be issued, as a condition of such transfer. 2. VALUATION 2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the value of the Assets computed as of the close of regular trading on the NYSE on the date of the Closing ("Valuation Time"), using the valuation procedures set forth in Target's most recent annual report to its stockholders, less (b) the amount of the Liabilities as of the Valuation Time. 2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund Share shall be computed as of the Valuation Time, using the valuation procedures set forth in Acquiring Fund's most recent annual report to its stockholders. 2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by or under the direction of Mitchell Hutchins Asset Management Inc. A-2 3. CLOSING AND EFFECTIVE TIME 3.1. The Reorganization, together with related acts necessary to consummate the same ("Closing"), shall occur at the Funds' principal office on ________, 2000, or at such other place and/or on such other date as to which the Funds may agree. All acts taking place at the Closing shall be deemed to take place simultaneously as of the close of business on the date thereof or at such other time as to which the Funds may agree ("Effective Time"). If, immediately before the Valuation Time, (a) the NYSE is closed to trading or trading thereon is restricted or (b) trading or the reporting of trading on the NYSE or elsewhere is disrupted, so that accurate appraisal of the net value of Target and the NAV of an Acquiring Fund Share is impracticable, the Effective Time shall be postponed until the first business day after the day when such trading shall have been fully resumed and such reporting shall have been restored. 3.2. Target's fund accounting and pricing agent shall deliver at the Closing a certificate of an authorized officer verifying that the information (including adjusted basis and holding period, by lot) concerning the Assets transferred by Target to Acquiring Fund, as reflected on Acquiring Fund's books immediately following the Closing, does or will conform to such information on Target's books immediately before the Closing. Target's custodian shall deliver at the Closing a certificate of an authorized officer stating that (a) the Assets held by the custodian will be transferred to Acquiring Fund at the Effective Time and (b) all necessary taxes in conjunction with the delivery of the Assets, including all applicable federal and state stock transfer stamps, if any, have been paid or provision for payment has been made. 3.3. Target shall deliver to Acquiring Fund at the Closing a list of the names and addresses of the Stockholders and the number of outstanding Target Shares owned by each Stockholder, all as of the Effective Time, certified by Target's Secretary or Assistant Secretary. Acquiring Fund's transfer agent shall deliver at the Closing a certificate as to the opening on Acquiring Fund's share transfer books of accounts in the Stockholders' names. Acquiring Fund shall issue and deliver a confirmation to Target evidencing the Acquiring Fund Shares to be credited to Target at the Effective Time or provide evidence satisfactory to Target that such Acquiring Fund Shares have been credited to Target's account on Acquiring Fund's books. At the Closing, each Fund shall deliver to the other such bills of sale, checks, assignments, stock certificates, receipts, or other documents as the other Fund or its counsel may reasonably request. 3.4. Each Fund shall deliver to the other at the Closing a certificate executed in its name by its President or a Vice President in form and substance satisfactory to the recipient and dated the Effective Time, to the effect that the representations and warranties it made in this Agreement are true and correct at the Effective Time except as they may be affected by the transactions contemplated by this Agreement. 4. REPRESENTATIONS AND WARRANTIES 4.1. Target represents and warrants as follows: 4.1.1. Target is a corporation that is duly organized, validly existing, and in good standing under the laws of the State of Maryland; and a copy of its Articles of Incorporation is on file with the Department of Assessments and Taxation of that state; 4.1.2. Target is duly registered as a closed-end management investment company under the Investment Company Act of 1940, as amended ("1940 Act"), and such registration will be in full force and effect at the Effective Time; A-3 4.1.3. Target is duly registered under the Securities Exchange Act of 1934, as amended ("1934 Act") , and such registration will be in full force and effect at the Effective Time; 4.1.4. At the Closing, Target will have good and marketable title to the Assets and full right, power, and authority to sell, assign, transfer, and deliver the Assets free of any liens or other encumbrances; and upon delivery and payment for the Assets, Acquiring Fund will acquire good and marketable title thereto; 4.1.5. Target is not in violation of, and the execution and delivery of this Agreement and consummation of the transactions contemplated hereby will not conflict with or violate, Maryland law or any provision of Target's Articles of Incorporation or By-Laws or of any agreement, instrument, lease, or other undertaking to which Target is a party or by which it is bound or result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which Target is a party or by which it is bound, except as previously disclosed in writing to and accepted by Acquiring Fund; 4.1.6. Except as otherwise disclosed in writing to and accepted by Acquiring Fund, all material contracts and other commitments of or applicable to Target (other than this Agreement and investment contracts, including options, futures, and forward contracts) will be terminated, or provision for discharge of any liabilities of Target thereunder will be made, at or prior to the Effective Time, without either Fund's incurring any liability or penalty with respect thereto and without diminishing or releasing any rights Target may have had with respect to actions taken or omitted or to be taken by any other party thereto prior to the Closing; 4.1.7. Except as otherwise disclosed in writing to and accepted by Acquiring Fund, no litigation, administrative proceeding, or investigation of or before any court or governmental body is presently pending or (to Target's knowledge) threatened against Target or any of its properties or assets that, if adversely determined, would materially and adversely affect its financial condition or the conduct of its business; and Target knows of no facts that might form the basis for the institution of any such litigation, proceeding, or investigation and is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially or adversely affects its business or its ability to consummate the transactions contemplated hereby; 4.1.8. The execution, delivery, and performance of this Agreement have been duly authorized as of the date hereof by all necessary action on the part of Target's board of directors, which has made the determinations required by Rule 17a-8(a) under the 1940 Act; and, subject to approval by Target's stockholders, this Agreement constitutes a valid and legally binding obligation of Target, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity; 4.1.9. At the Effective Time, the performance of this Agreement shall have been duly authorized by all necessary action by Target's stockholders; 4.1.10. No governmental consents, approvals, authorizations, or filings are required under the Securities Act of 1933, as amended ("1933 Act"), the 1934 Act, or the 1940 Act, for the execution or performance of this Agreement by Target, except for (a) the filing with the Securities and Exchange Commission ("SEC") of a registration statement A-4 by Acquiring Fund on Form N-14 relating to the Acquiring Fund Shares issuable hereunder, and any supplement or amendment thereto ("Registration Statement"), including therein a prospectus/proxy statement ("Proxy Statement"), and (b) such consents, approvals, authorizations, and filings as have been made or received or as may be required subsequent to the Effective Time; 4.1.11. On the effective date of the Registration Statement, at the time of the stockholders' meeting referred to in paragraph 5.2, and at the Effective Time, the Proxy Statement will (a) comply in all material respects with the applicable provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations thereunder and (b) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading; provided that the foregoing shall not apply to statements in or omissions from the Proxy Statement made in reliance on and in conformity with information furnished by Acquiring Fund for use therein; 4.1.12. The Liabilities were incurred by Target in the ordinary course of its business and are associated with the Assets; and there are no Liabilities other than liabilities disclosed or provided for in Target's financial statements referred to in paragraph 4.1.17 and liabilities incurred by Target in the ordinary course of its business subsequent to July 31, 1999, or otherwise previously disclosed to Acquiring Fund, none of which has been materially adverse to the business, assets, or results of Target operations; 4.1.13. Target qualified for treatment as a regulated investment company under Subchapter M of the Code ("RIC") for each past taxable year since it commenced operations and will continue to meet all the requirements for such qualification for its current taxable year; it has no earnings and profits accumulated in any taxable year in which the provisions of Subchapter M did not apply to it; and the Assets will be invested at all times through the Effective Time in a manner that ensures compliance with the foregoing; 4.1.14. Target is not under the jurisdiction of a court in a proceeding under Title 11 of the United States Code or similar case within the meaning of section 368(a)(3)(A) of the Code; 4.1.15. Not more than 25% of the value of Target's total assets (excluding cash, cash items, and U.S. government securities) is invested in the stock and securities of any one issuer, and not more than 50% of the value of such assets is invested in the stock and securities of five or fewer issuers; 4.1.16. Target's federal income tax returns, and all applicable state and local tax returns, for all taxable years through and including the taxable year ended July 31, 1998, have been timely filed and all taxes payable pursuant to such returns have been timely paid; and 4.1.17. Target's financial statements for the year ended July 31, 1999, to be delivered to Acquiring Fund, fairly represent Target's financial position as of that date and the results of its operations and changes in its net assets for the year then ended. 4.2. Acquiring Fund represents and warrants as follows: 4.2.1. Acquiring Fund is a corporation that is duly organized, validly existing, and in good standing under the laws of the State of Maryland; and a copy of its Articles of Incorporation is on file with the State Department of Assessments and Taxation of that state; A-5 4.2.2. Acquiring Fund is duly registered as a closed-end management investment company under the 1940 Act, and such registration will be in full force and effect at the Effective Time; 4.2.3. Acquiring Fund is duly registered under the 1934 Act, and such registration will be in full force and effect at the Effective Time; 4.2.4. No consideration other than Acquiring Fund Shares (and Acquiring Fund's assumption of the Liabilities) will be issued in exchange for the Assets in the Reorganization; 4.2.5. The Acquiring Fund Shares to be issued and delivered to Target hereunder will, at the Effective Time, have been duly authorized and, when issued and delivered as provided herein, will be duly and validly issued and outstanding shares of Acquiring Fund, fully paid and non-assessable; 4.2.6. Acquiring Fund's prospectus and statement of additional information included on Form N-14 conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 4.2.7. Acquiring Fund is not in violation of, and the execution and delivery of this Agreement and consummation of the transactions contemplated hereby will not conflict with or violate, Maryland law or any provision of Acquiring Fund's Articles of Incorporation or Amended and Restated Bylaws or of any provision of any agreement, instrument, lease, or other undertaking to which Acquiring Fund is a party or by which it is bound or result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which Acquiring Fund is a party or by which it is bound, except as previously disclosed in writing to and accepted by Target; 4.2.8. Except as otherwise disclosed in writing to and accepted by Target, no litigation, administrative proceeding, or investigation of or before any court or governmental body is presently pending or (to Acquiring Fund's knowledge) threatened against Acquiring Fund or any of its properties or assets that, if adversely determined, would materially and adversely affect its financial condition or the conduct of its business; and Acquiring Fund knows of no facts that might form the basis for the institution of any such litigation, proceeding, or investigation and is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially or adversely affects its business or its ability to consummate the transactions contemplated hereby; 4.2.9. The execution, delivery, and performance of this Agreement have been duly authorized as of the date hereof by all necessary action on the part of Acquiring Fund's board of directors (together with Target's board of directors, the "Boards"), which has made the determinations required by Rule 17a-8(a) under the 1940 Act; and this Agreement constitutes a valid and legally binding obligation of Acquiring Fund, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity; A-6 4.2.10. No governmental consents, approvals, authorizations, or filings are required under the 1933 Act, the 1934 Act, or the 1940 Act, for the execution or performance of this Agreement by Acquiring Fund, except for (a) the filing with the SEC of the Registration Statement and (b) such consents, approvals, authorizations, and filings as have been made or received or as may be required subsequent to the Effective Time; 4.2.11. On the effective date of the Registration Statement, at the time of the stockholders' meeting referred to in paragraph 5.2, and at the Effective Time, the Proxy Statement will (a) comply in all material respects with the applicable provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations thereunder and (b) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading; provided that the foregoing shall not apply to statements in or omissions from the Proxy Statement made in reliance on and in conformity with information furnished by Target for use therein; 4.2.12. Acquiring Fund qualified for treatment as a RIC for each past taxable year since it commenced operations and will continue to meet all the requirements for such qualification for its current taxable year; it intends to continue to meet all such requirements for the next taxable year; and it has no earnings and profits accumulated in any taxable year in which the provisions of Subchapter M of the Code did not apply to it; 4.2.13. Acquiring Fund has no plan or intention to issue additional Acquiring Fund Shares following the Reorganization other than in the ordinary course of business pursuant to its Dividend Reinvestment Plan; nor does Acquiring Fund have any plan or intention to redeem or otherwise reacquire any Acquiring Fund Shares issued to the Stockholders pursuant to the Reorganization; 4.2.14. Following the Reorganization, Acquiring Fund (a) will continue Target's "historic business" (within the meaning of section 1.368-1(d)(2) of the Regulations) and (b) will use a significant portion of Target's "historic business assets" (within the meaning of section 1.368-1(d)(3) of the Regulations) in a business; furthermore, Acquiring Fund (c) has no plan or intention to sell or otherwise dispose of any of the Assets, except for dispositions made in the ordinary course of that business and dispositions necessary to maintain its status as a RIC, and (d) expects to retain substantially all the Assets in the same form as it receives them in the Reorganization, unless and until subsequent investment circumstances suggest the desirability of change or it becomes necessary to make dispositions thereof to maintain such status; 4.2.15. There is no plan or intention for Acquiring Fund to be dissolved or merged into another corporation or a business trust or any "fund" thereof (within the meaning of section 851(g)(2) of the Code) following the Reorganization; 4.2.16. Immediately after the Reorganization, (a) not more than 25% of the value of Acquiring Fund's total assets (excluding cash, cash items, and U.S. government securities) will be invested in the stock and securities of any one issuer and (b) not more than 50% of the value of such assets will be invested in the stock and securities of five or fewer issuers; 4.2.17. Acquiring Fund does not directly or indirectly own, nor at the Effective Time will it directly or indirectly own, nor has it directly or indirectly owned, at any time during the past five years, any shares of Target; A-7 4.2.18. Acquiring Fund's federal income tax returns, and all applicable state and local tax returns, for all taxable years through and including the taxable year ended May 31, 1999, have been timely filed and all taxes payable pursuant to such returns have been timely paid; and 4.2.19. Acquiring Fund's financial statements for the year ended May 31, 1999, to be delivered to Target, fairly represent Acquiring Fund's financial position as of that date and the results of its operations and changes in its net assets for the year then ended. 4.3. Each Fund represents and warrants as follows: 4.3.1. The fair market value of the Acquiring Fund Shares received by each Stockholder will be approximately equal to the fair market value of its Target Shares constructively surrendered in exchange therefor; 4.3.2. Its management is unaware of any plan or intention of Stockholders to sell or otherwise dispose of (a) any portion of their Target Shares before the Reorganization to any person related (within the meaning of section 1.368-1(e)(3) of the Regulations) to either Fund or (b) any portion of the Acquiring Fund Shares to be received by them in the Reorganization to any person related (within such meaning) to Acquiring Fund; 4.3.3. The Stockholders will pay their own expenses, if any, incurred in connection with the Reorganization; 4.3.4. Immediately following consummation of the Reorganization, Acquiring Fund will hold substantially the same assets and be subject to substantially the same liabilities that Target held or was subject to immediately prior thereto (in addition to the assets and liabilities Acquiring Fund then held or was subject to), plus any liabilities and expenses of the parties incurred in connection with the Reorganization; 4.3.5. The fair market value of the Assets on a going concern basis will equal or exceed the Liabilities to be assumed by Acquiring Fund and those to which the Assets are subject; 4.3.6. There is no intercompany indebtedness between the Funds that was issued or acquired, or will be settled, at a discount; 4.3.7. Pursuant to the Reorganization, Target will transfer to Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair market value of the net assets, and at least 70% of the fair market value of the gross assets, held by Target immediately before the Reorganization. For the purposes of this representation, any amounts (a) paid by Target to Stockholders who receive cash or other property (whether in lieu of fractional shares or otherwise) and (b) used by Target to pay its Reorganization expenses and to make redemptions and distributions immediately before the Reorganization (except distributions made to conform to its policy of distributing all or substantially all of its income and gains to avoid the obligation to pay federal income tax and/or the excise tax under section 4982 of the Code) will be included as assets held thereby immediately before the Reorganization; 4.3.8. None of the compensation received by any Stockholder who is an employee of or service provider to Target will be separate consideration for, or allocable to, any of the Target Shares held by such Stockholder; none of the Acquiring Fund Shares received by any such Stockholder will be separate consideration for, or allocable to, any A-8 employment agreement, investment advisory agreement, or other service agreement; and the consideration paid to any such Stockholder will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services; 4.3.9. Cash is being distributed to the Stockholders that are not DRP Stockholders in lieu of fractional Acquiring Fund Shares solely to save Acquiring Fund the expense and inconvenience of issuing and transferring fractional shares to those stockholders; that distribution does not represent separately bargained-for consideration in the Reorganization. The total cash consideration paid to those Stockholders instead of issuing fractional Acquiring Fund Shares will not exceed 1% of the total consideration that will be issued to them in exchange for their Target Shares; and the fractional share interests of the Stockholders will be aggregated, and no Stockholder will receive cash in an amount equal to or greater than the value of one full Acquiring Fund Share; 4.3.10. Immediately after the Reorganization, the Stockholders will not own shares constituting "control" (within the meaning of section 304(c) of the Code) of Acquiring Fund; and 4.3.11. Neither Fund will be reimbursed for any expenses incurred by it or on its behalf in connection with the Reorganization unless those expenses are solely and directly related to the Reorganization (determined in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B. 187) ("Reorganization Expenses"). 5. COVENANTS 5.1. Each Fund covenants to operate its respective business in the ordinary course between the date hereof and the Closing, it being understood that - (a) such ordinary course will include declaring and paying customary dividends and other distributions and changes in operations contemplated by each Fund's normal business activities, and (b) each Fund will retain exclusive control of the composition of its portfolio until the Closing; provided that (1) Target shall not dispose of more than an insignificant portion of its historic business assets during such period without Acquiring Fund's prior consent and (2) if Target's stockholders approve this Agreement (and the transactions contemplated hereby), then between the date of such approval and the Closing, the Funds shall coordinate their respective portfolios so that the transfer of the Assets to Acquiring Fund will not cause it to fail to be in compliance with all of its investment policies and restrictions immediately after the Closing. 5.2. Target covenants to call a stockholders' meeting to consider and act on this Agreement and to take all other action necessary to obtain approval of the transactions contemplated hereby. 5.3. Target covenants that the Acquiring Fund Shares to be delivered hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms hereof. 5.4. Target covenants that it will assist Acquiring Fund in obtaining information Acquiring Fund reasonably requests concerning the beneficial ownership of Target Shares. A-9 5.5. Target covenants that its books and records (including all books and records required to be maintained under the 1940 Act and the rules and regulations thereunder) will be turned over to Acquiring Fund at the Closing. 5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in compliance with applicable federal and state securities laws. 5.7. Each Fund covenants that it will, from time to time, as and when requested by the other Fund, execute and deliver or cause to be executed and delivered all such assignments and other instruments, and will take or cause to be taken such further action, as the other Fund may deem necessary or desirable in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession of all the Assets, and (b) Target, title to and possession of the Acquiring Fund Shares to be delivered hereunder, and otherwise to carry out the intent and purpose hereof. 5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act, and such state securities laws it may deem appropriate to continue its operations after the Effective Time. 5.9. Subject to this Agreement, each Fund covenants to take or cause to be taken all actions, and to do or cause to be done all things, reasonably necessary, proper, or advisable to consummate and effectuate the transactions contemplated hereby. 6. CONDITIONS PRECEDENT Each Fund's obligations hereunder shall be subject to (a) performance by the other Fund of all its obligations to be performed hereunder at or before the Effective Time, (b) all representations and warranties of the other Fund contained herein being true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated hereby, as of the Effective Time, with the same force and effect as if made at and as of the Effective Time, and (c) the following further conditions that, at or before the Effective Time: 6.1. This Agreement and the transactions contemplated hereby shall have been duly adopted and approved by each Board and shall have been approved by Target's stockholders in accordance with its Articles of Incorporation, its By-laws, and applicable law. 6.2. All necessary filings shall have been made with the SEC and state securities authorities, and no order or directive shall have been received that any other or further action is required to permit the parties to carry out the transactions contemplated hereby. The Registration Statement shall have become effective under the 1933 Act, no stop orders suspending the effectiveness thereof shall have been issued, and the SEC shall not have issued an unfavorable report with respect to the Reorganization under section 25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin consummation of the transactions contemplated hereby under section 25(c) of the 1940 Act. All consents, orders, and permits of federal, state, and local regulatory authorities (including the SEC and state securities authorities) deemed necessary by either Fund to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain same would not involve a risk of a material adverse effect on either Fund's assets or properties, provided that either Fund may for itself waive any of such conditions. 6.3. At the Effective Time, no action, suit, or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or to obtain damages or other relief in connection with, the transactions contemplated hereby. A-10 6.4. Target shall have received an opinion of Kirkpatrick & Lockhart LLP ("Counsel") substantially to the effect that: 6.4.1. Acquiring Fund is a corporation that is duly organized, validly existing, and in good standing under the laws of the State of Maryland with power under its Articles of Incorporation to own all its properties and assets and, to the knowledge of Counsel, to carry on its business as presently conducted; 6.4.2. This Agreement (a) has been duly authorized, executed, and delivered by Acquiring Fund and (b) assuming due authorization, execution, and delivery of this Agreement by Target, is a valid and legally binding obligation of Acquiring Fund, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity; 6.4.3. The Acquiring Fund Shares to be issued and distributed to the Stockholders under this Agreement, assuming their due delivery as contemplated by this Agreement, will be duly authorized, validly issued and outstanding, and fully paid and non-assessable; 6.4.4. The execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, materially violate Acquiring Fund's Articles of Incorporation or Amended and Restated Bylaws or any provision of any agreement (known to Counsel, without any independent inquiry or investigation) to which Acquiring Fund is a party or by which it is bound or (to the knowledge of Counsel, without any independent inquiry or investigation) result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which Acquiring Fund is a party or by which it is bound, except as set forth in such opinion or as previously disclosed in writing to and accepted by Target; 6.4.5. To the knowledge of Counsel (without any independent inquiry or investigation), no consent, approval, authorization, or order of any court or governmental authority is required for the consummation by Acquiring Fund of the transactions contemplated herein, except those obtained under the 1933 Act, the 1934 Act, and the 1940 Act, and those that may be required under state securities laws; 6.4.6. Acquiring Fund is registered with the SEC as an investment company, and to the knowledge of Counsel no order has been issued or proceeding instituted to suspend such registration; and 6.4.7. To the knowledge of Counsel (without any independent inquiry or investigation), (a) no litigation, administrative proceeding, or investigation of or before any court or governmental body is pending or threatened as to Acquiring Fund or any of its properties or assets and (b) Acquiring Fund is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects its business, except as set forth in such opinion or as otherwise disclosed in writing to and accepted by Target. In rendering such opinion, Counsel may (1) rely, as to matters governed by the laws of the State of Maryland, on an opinion of competent Maryland counsel, (2) make assumptions regarding the authenticity, genuineness, and/or conformity of documents and copies thereof without independent verification thereof, (3) limit such opinion to applicable federal and state law, and (4) define the word "knowledge" and related terms to mean the knowledge of attorneys then with Counsel who have devoted substantive attention to matters directly related to this Agreement and the Reorganization. A-11 6.5. Acquiring Fund shall have received an opinion of Counsel substantially to the effect that: 6.5.1. Target is a corporation that is duly organized, validly existing, and in good standing under the laws of the State of Maryland with power under its Articles of Incorporation to own all its properties and assets and, to the knowledge of Counsel, to carry on its business as presently conducted; 6.5.2. This Agreement (a) has been duly authorized, executed, and delivered by Target and (b) assuming due authorization, execution, and delivery of this Agreement by Acquiring Fund, is a valid and legally binding obligation of Target, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity; 6.5.3. The execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, materially violate Target's Articles of Incorporation or By-Laws or any provision of any agreement (known to Counsel, without any independent inquiry or investigation) to which Target is a party or by which it is bound or (to the knowledge of Counsel, without any independent inquiry or investigation) result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which Target is a party or by which it is bound, except as set forth in such opinion or as previously disclosed in writing to and accepted by Acquiring Fund; 6.5.4. To the knowledge of Counsel (without any independent inquiry or investigation), no consent, approval, authorization, or order of any court or governmental authority is required for the consummation by Target of the transactions contemplated herein, except those obtained under the 1933 Act, the 1934 Act, and the 1940 Act, and those that may be required under state securities laws; 6.5.5. Target is registered with the SEC as an investment company, and to the knowledge of Counsel no order has been issued or proceeding instituted to suspend such registration; and 6.5.6. To the knowledge of Counsel (without any independent inquiry or investigation), (a) no litigation, administrative proceeding, or investigation of or before any court or governmental body is pending or threatened as to Target or any of its properties or assets and (b) Target is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects Target's business, except as set forth in such opinion or as otherwise disclosed in writing to and accepted by Acquiring Fund. In rendering such opinion, Counsel may (1) rely, as to matters governed by the laws of the State of Maryland, on an opinion of competent Maryland counsel, (2) make assumptions regarding the authenticity, genuineness, and/or conformity of documents and copies thereof without independent verification thereof, (3) limit such opinion to applicable federal and state law, and (4) define the word "knowledge" and related terms to mean the knowledge of attorneys then with Counsel who have devoted substantive attention to matters directly related to this Agreement and the Reorganization. A-12 6.6. Each Fund shall have received an opinion of Counsel, addressed to and in form and substance satisfactory to it, as to the federal income tax consequences mentioned below ("Tax Opinion"). In rendering the Tax Opinion, Counsel may rely as to factual matters, exclusively and without independent verification, on the representations made in this Agreement (which shall be treated for those purposes as being made to Counsel) or in separate letters addressed to Counsel and the certificates delivered pursuant to paragraph 3.4. The Tax Opinion shall be substantially to the effect that, based on the facts and assumptions stated therein and conditioned on consummation of the Reorganization in accordance with this Agreement, for federal income tax purposes: 6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely for full and fractional Acquiring Fund Shares (plus cash in lieu of fractional shares) and Acquiring Fund's assumption of the Liabilities, followed by Target's distribution of those full Acquiring Fund Shares PRO RATA to the Stockholders, those fractional Acquiring Fund Shares to DRP Stockholders, and such cash to the remaining Stockholders, constructively in exchange for their Target Shares, will qualify as a reorganization within the meaning of section 368(a)(1)(C) of the Code, and each Fund will be "a party to a reorganization" within the meaning of section 368(b) of the Code; 6.6.2. Target will recognize no gain or loss on the transfer of the Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares (plus cash in lieu of fractional shares) and Acquiring Fund's assumption of the Liabilities or on the subsequent distribution of those shares and cash to the Stockholders in constructive exchange for their Target Shares; 6.6.3. Acquiring Fund will recognize no gain or loss on its receipt of the Assets in exchange solely for Acquiring Fund Shares (plus cash in lieu of fractional shares) and its assumption of the Liabilities; 6.6.4. Acquiring Fund's basis for the Assets will be the same as Target's basis therefor immediately before the Reorganization, and Acquiring Fund's holding period for the Assets will include Target's holding period therefor; 6.6.5. A Stockholder will recognize no gain or loss on the constructive exchange of all its Target Shares solely for Acquiring Fund Shares, except with respect to cash received in lieu of a fractional Acquiring Fund share pursuant to the Reorganization; and 6.6.6. A Stockholder's aggregate basis for the Acquiring Fund Shares to be received by it in the Reorganization will be the same as the aggregate basis for its Target Shares to be constructively surrendered in exchange for those Acquiring Fund Shares, decreased by any cash received, and increased by any gain recognized, on the exchange; and its holding period for those Acquiring Fund Shares will include its holding period for those Target Shares, provided the Stockholder held them as capital assets at the Effective Time. Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no opinion is expressed as to the effect of the Reorganization on the Funds or any Stockholder with respect to any asset as to which any unrealized gain or loss is required to be recognized for federal income tax purposes at the end of a taxable year (or on the termination or transfer thereof) under a mark-to-market system of accounting. At any time before the Closing, either Fund may waive any of the foregoing conditions (except that set forth in paragraph 6.1) if, in the judgment of its Board, such waiver will not have a material adverse effect on its stockholders' interests. 7. BROKERAGE FEES AND EXPENSES 7.1. Each Fund represents and warrants to the other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein. A-13 7.2. Each Fund will bear its own Reorganization Expenses. 8. ENTIRE AGREEMENT; NO SURVIVAL Neither party has made any representation, warranty, or covenant not set forth herein, and this Agreement constitutes the entire agreement between the parties. The representations, warranties, and covenants contained herein or in any document delivered pursuant hereto or in connection herewith shall not survive the Closing. 9. TERMINATION OF AGREEMENT This Agreement may be terminated at any time at or prior to the Effective Time, whether before or after approval by Target's stockholders: 9.1. By either Fund (a) in the event of the other Fund's material breach of any representation, warranty, or covenant contained herein to be performed at or prior to the Effective Time, (b) if a condition to its obligations has not been met and it reasonably appears that such condition will not or cannot be met, (c) if its Board, in the Board's sole discretion, determines that proceeding with the Reorganization would not be in the best interest of its stockholders, or (d) if the Closing has not occurred on or before _________, 2000; or 9.2. By the parties' mutual agreement. In the event of termination under paragraphs 9.1(c) or (d) or 9.2, there shall be no liability for damages on the part of either Fund, or its directors or officers, to the other Fund. 10. AMENDMENT This Agreement may be amended, modified, or supplemented at any time, notwithstanding approval thereof by Target's stockholders, in any manner mutually agreed upon in writing by the parties; provided that following such approval no such amendment shall have a material adverse effect on the Stockholders' interests. 11. MISCELLANEOUS 11.1. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Maryland; provided that, in the case of any conflict between such laws and the federal securities laws, the latter shall govern. 11.2. Nothing expressed or implied herein is intended or shall be construed to confer upon or give any person, firm, trust, or corporation other than the parties and their respective successors and assigns any rights or remedies under or by reason of this Agreement. 11.3. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been executed by each Fund and delivered to the other party hereto. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. A-14 IN WITNESS WHEREOF, each party has caused this Agreement to be executed and delivered by its duly authorized officers as of the day and year first written above. ATTEST: MANAGED HIGH YIELD FUND INC. - --------------------------- By: ----------------------------- Secretary President ATTEST: MANAGED HIGH YIELD PLUS FUND INC. --------------------------- By: ----------------------------- Secretary President A-15 APPENDIX B BOARD MEMBERS AND OFFICERS OF MANAGED HIGH YIELD AND MANAGED HIGH YIELD PLUS The following is a list of the present Board Members and the Officers of both Funds, their ages, business addresses and a description of their principal occupations during the past five years: POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- Margo N. Alexander**; 52 Director and Mrs. Alexander is chairman President (since March 1999), chief executive officer and a director of Mitchell Hutchins (since January 1995) and also an executive vice president and a director of PaineWebber Incorporated ("PaineWebber") (since March 1984). Mrs. Alexander is president and a director or trustee of 32 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Richard Q. Armstrong; 64 Director Mr. Armstrong is chairman and R.Q.A. Enterprises principal of R.Q.A Enterprises One Old Church Road (management consulting firm) Unit #6 (since April 1991 and Greenwich, CT 06830 principal occupation since March 1995). Mr. Armstrong was chairman of the board, chief executive officer and co-owner of Adirondack Beverages (producer and distributor of soft drinks and sparkling/still waters) (October 1993-March 1995). He was a partner of the New England Consulting Group (management consulting firm) (December 1992-September 1993). He was managing director of LVMH U.S. Corporation (U.S. subsidiary of the French luxury goods conglomerate, Louis Vuitton Moet Hennessey Corporation) (1987-1991) and B-1 POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- chairman of its wine and spirits subsidiary, Schieffelin & Somerset Company (1987-1991). Mr. Armstrong is a director or trustee of 31 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. E. Garrett Bewkes, Jr.**; 73 Director and Mr. Bewkes is a director of Chairman of Paine Webber Group Inc. ("PW the Board Group") (holding company of PaineWebber and Mitchell Hutchins). Prior to December 1995, he was a consultant to PW Group. Prior to 1988, he was chairman of the board, president and chief executive officer of American Bakeries Company. Mr. Bewkes is a director of Interstate Bakeries Corporation. Mr. Bewkes is a director or trustee of 35 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Richard R. Burt; 53 Director Mr. Burt is chairman of IEP 1275 Pennsylvania Ave., Advisors, LLP (international N.W., Washington, D.C. 20004 investments and consulting firm) (since March 1994) and a partner of McKinsey & Company (management consulting firm) (since 1991). He is also a director of Archer-Daniels-Midland Co. (agricultural commodities), Hollinger International Co. (publishing), Homestake Mining Corp. (gold mining) and Weirton Steel Corp (makes and finishes steel products) (since April 1996) and vice chairman of Anchor Gaming (provides technology to gaming and wagering industry) (since July 1999). He was the chief negotiator in the Strategic Arms Reduction B-2 POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- Talks with the former Soviet Union (1989-1991) and the U.S. Ambassador to the Federal Republic of Germany (1985-1989). Mr. Burt is a director or trustee of 31 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Mary C. Farrell**; 50 Director Ms. Farrell is a managing director, senior investment strategist and member of the Investment Policy Committee of PaineWebber. Ms. Farrell joined PaineWebber in 1982. She is a member of the Financial Women's Association and Women's Economic Roundtable and appears as a regular panelist on Wall $treet Week with Louis Rukeyser. She also serves on the Board of Overseers of New York University's Stern School of Business. Ms. Farrell is a director or trustee of 30 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Meyer Feldberg; 57 Director Mr. Feldberg is Dean and Columbia University Professor of Management of the 101 Uris Hall Graduate School of Business, New York, New York 10027 Columbia University. Prior to 1989, he was president of the Illinois Institute of Technology. Dean Feldberg is also a director of Primedia Inc. (publishing), Federated Department Stores, Inc. (operator of department stores) and Revlon, Inc. (cosmetics). Dean Feldberg is a director or trustee of 34 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. B-3 POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- George W. Gowen; 70 Director Mr. Gowen is a partner in the 666 Third Avenue law firm of Dunnington, New York, New York 10017 Bartholow & Miller. Prior to May 1994, he was a partner in the law firm of Fryer, Ross & Gowen. Mr. Gowen is a director or trustee of 34 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Frederic V. Malek; 63 Director Mr. Malek is chairman of 1455 Pennsylvania Avenue, N.W. Thayer Capital Partners Suite 350 (merchant bank) and chairman Washington, D.C. 20004 of Thayer Hotel Investors II and Lodging Opportunities Fund (hotel investment partnerships). From January 1992 to November 1992, he was campaign manager of Bush-Quayle `92. From 1990 to 1992, he was vice chairman and, from 1989 to 1990, he was president of Northwest Airlines Inc. and NWA Inc. (holding company of Northwest Airlines Inc.). Prior to 1989, he was employed by the Marriott Corporation (hotels, restaurants, airline catering and contract feeding), where he most recently was an executive vice president and president of Marriott Hotels and Resorts. Mr. Malek is also a director of Aegis Communications, Inc. (tele-services), American Management Systems, Inc. (management consulting and computer-related services), Automatic Data Processing, Inc. (computing services), CB Richard Ellis, Inc. (real estate services), FPL Group, Inc. (electric services), Global Vacation Group (packaged vacations), HCR/Manor Care, Inc. (health care), SAGA Systems, Inc. and Northwest Airlines Inc. Mr Malek is a director or trustee of 31 investment companies for B-4 POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Carl W. Schafer; 64 Director Mr. Schafer is president of 66 Witherspoon Street the Atlantic Foundation #1100 (charitable foundation Princeton, NJ 08542 supporting mainly oceanographic exploration and research). He also is a director of Labor Ready, Inc. (temporary employment), Roadway Express, Inc. (trucking), The Guardian Group of Mutual Funds, the Harding, Loevner Funds, E.I.I. Realty Trust (investment company), Evans Systems, Inc. (motor fuels, convenience store and diversified company), Electronic Clearing House, Inc. (financial transactions processing), Frontier Oil Corporation and Nutraceutix, Inc. (biotechnology company). Prior to January 1993, he was chairman of the Investment Advisory Committee of the Howard Hughes Medical Institute. Mr. Schafer is a director or trustee of 31 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Brian M. Storms**; 45 Director Mr. Storms is president and chief operating officer of Mitchell Hutchins (since March 1999). Mr. Storms was president of Prudential Investments (1996-1999). Prior to joining prudential, he was a managing director at Fidelity Investments. Mr. Storms is a director or trustee of 31 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. B-5 POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- James F. Keegan; 39 Vice President Mr. Keegan is a senior vice president and a portfolio manager of Mitchell Hutchins. Prior to March 1996, he was director of fixed income strategy and research of Merrion Group, L.P. From 1987 to 1994, he was a vice president of global investment management of Bankers Trust. Mr. Keegan is a vice president of four investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. John J. Lee; 31 Vice President Mr. Lee is a vice president and and a manager of the mutual Assistant fund finance department of Treasurer Mitchell Hutchins. Prior to September 1997, he was an audit manager in the financial services practice of Ernst & Young LLP. Mr. Lee is a vice president and assistant treasurer of 32 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Dennis McCauley; 53 Vice President Mr. McCauley is a managing director and chief investment officer--fixed income of Mitchell Hutchins. Prior to December 1994, he was director of fixed income investments of IBM Corporation. Mr. McCauley is a vice president of 22 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Ann E. Moran; 42 Vice President Ms. Moran is a vice president and and a manager of the mutual Assistant fund finance department of Treasurer Mitchell Hutchins. Ms. Moran is a vice president and assistant treasurer of 32 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Dianne E. O'Donnell; 47 Vice President Ms. O'Donnell is a senior vice and president and deputy general Secretary counsel of Mitchell Hutchins. Ms. O'Donnell is a vice B-6 POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- president and secretary of 31 investment companies and a vice president and assistant secretary of one investment company for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Emil Polito; 39 Vice President Mr. Polito is a senior vice president and director of operations and control for Mitchell Hutchins. Mr. Polito is a vice president of 32 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Victoria E. Schonfeld; 49 Vice President Ms. Schonfeld is a managing director and general counsel of Mitchell Hutchins since May 1994 and a senior vice president of PaineWebber Incorporated since July 1995. Ms. Schonfeld is a vice president of 31 investment companies and a vice president and secretary of one investment company for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Paul H. Schubert; 37 Vice President Mr. Schubert is a senior vice and Treasurer president and the director of the mutual fund finance department of Mitchell Hutchins. Mr. Schubert is a vice president and treasurer of 32 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Barney A. Taglialatela; 39 Vice President Mr. Taglialatela is a vice and president and a manager of the Assistant mutual fund finance department Treasurer of Mitchell Hutchins. Prior to February 1995, he was a manager of the mutual fund finance division of Kidder Peabody Asset Management, B-7 POSITION BUSINESS EXPERIENCE; NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS - ---------------------- -------------- -------------------- Inc. Mr. Taglialatela is a vice president and assistant treasurer of 32 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. Keith A. Weller, 38 Vice President Mr. Weller is a first vice and president and associate Assistant general counsel of Mitchell Secretary Hutchins. Prior to May 1995, he was an attorney in private practice. Mr. Weller is a vice president and assistant secretary of 31 investment companies for which Mitchell Hutchins, PaineWebber or one of their affiliates serves as investment adviser. - ------------- * Unless otherwise indicated, the business address of each listed person is 1285 Avenue of the Americas, New York, New York 10019. ** Mrs. Alexander, Mr. Bewkes, Ms. Farrell, and Mr. Storms are "interested persons" of the Fund as defined in the 1940 Act by virtue of their positions with Mitchell Hutchins, PaineWebber and/or PW Group. B-8 PROXY PROXY APPENDIX C MANAGED HIGH YIELD FUND INC. SPECIAL MEETING OF SHAREHOLDERS THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF MANAGED HIGH YIELD FUND INC. The undersigned hereby appoints as proxies ANDREW S. NOVAK and VICTORIA DRAKE and each of them (with the power of substitution) to vote for the undersigned all shares of common stock of the undersigned in Managed High Yield Fund Inc. at the above referenced meeting and any adjournment thereof, with all the power the undersigned would have if personally present. The shares represented by this proxy will be voted as instructed below. UNLESS INDICATED TO THE CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE "FOR" THE PROPOSAL RELATING TO MANAGED HIGH YIELD FUND INC. YOUR VOTE IS IMPORTANT Please date and sign this proxy on the reverse side and return it in the enclosed envelope to PFPC Inc., P. O. Box 9426, Wilmington, DE 19809-9038. PFPC Inc. has been engaged to forward the enclosed proxy material and to tabulate proxies returned by mail. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL. PLEASE INDICATE YOUR VOTE BY FILLING IN THE BOX COMPLETELY. EXAMPLE: PROPOSAL: FOR AGAINST ABSTAIN Approval of the Agreement and Plan of Reorganization and Termination that / / / / / / provides for the reorganization of Managed High Yield Fund Inc. into Managed High Yield Plus Fund Inc. PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD. C-1 YOUR VOTE IS IMPORTANT. PLEASE DATE AND SIGN THIS PROXY BELOW AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. This proxy will not be voted unless it is dated and signed exactly as instructed. If shares are held by an individual, sign your name exactly as it appears on this card. If shares are held jointly, either party may sign, but the name of the party signing should conform exactly to the name shown on this proxy card. If shares are held by a corporation, partnership or similar account, the name and the capacity of the individual signing the proxy card should be indicated unless it is reflected in the form of registration. For example: "ABC Corp., John Doe, Treasurer." Sign exactly as name appears hereon _____________________________________________________(L.S.) Signature _____________________________________________________(L.S.) Signature (if held jointly) Date ________________________________________________, 2000 PLEASE MARK YOUR VOTE ON THE REVERSE SIDE OF THIS CARD. C-2 MANAGED HIGH YIELD PLUS FUND INC. 51 WEST 52ND STREET NEW YORK, NEW YORK 10019-6114 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information relates specifically to the proposed Reorganization wherein Managed High Yield Plus Fund Inc. ("Plus Fund") would acquire all of the assets of the Managed High Yield Fund Inc. ("High Yield Fund") in exchange solely for shares of Plus Fund and the assumption by Plus Fund of all of High Yield Fund's liabilities. Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber, serves as investment adviser and administrator to Plus Fund and High Yield Fund. This Statement of Additional Information is not a prospectus and should be read only in conjunction with the Proxy Statement/Prospectus dated February ___, 2000, relating to the above-referenced matter. A copy of the Proxy Statement/Prospectus may be obtained without charge by calling toll-free [___________]. This Statement of Additional Information is dated ________ ___, 2000. TABLE OF CONTENTS PAGE ---- Investment Objectives and Policies.............................................2 Hedging and Other Strategies Using Derivative Instruments.....................21 Directors and Officers........................................................31 Control Persons And Principal Holders Of Securities...........................32 Investment Advisory Arrangements..............................................32 Custodian And Independent Auditors............................................34 Portfolio Transactions........................................................34 Taxation......................................................................37 Additional Information........................................................40 Ratings Information...........................................................41 Pro Forma Financials..........................................................43 The following supplements the information contained in the Proxy Statement/Prospectus concerning Managed High Yield Plus Fund Inc. ("Plus Fund" or "Fund"). INVESTMENT OBJECTIVES AND POLICIES LEVERAGE Plus Fund may borrow from affiliates of Mitchell Hutchins, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. The premise underlying the use of leverage is that the costs of leveraging generally will be based on short-term rates, which normally will be lower than the return (including the potential for capital appreciation) that Plus Fund can earn on the longer-term portfolio investments that it makes with the proceeds obtained through the leverage. Thus, the stockholders would benefit from an incremental return. However, if the differential between the return on Plus Fund's investments and the cost of leverage were to narrow, the incremental benefit would be reduced and could be eliminated or even become negative. Furthermore, if long-term rates rise, the NAV of the shares will reflect the resulting decline in the value of a larger aggregate amount of portfolio assets than Plus Fund would hold if it had not leveraged. Thus, leveraging exaggerates changes in the value and in the yield on Plus Fund's portfolio. This, in turn, may result in greater volatility of both the NAV and the market price of the shares. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, Plus Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return on the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to stockholders as dividends and other distributions will be reduced. Nevertheless, Mitchell Hutchins may determine to maintain Plus Fund's leveraged position if it deems such action to be appropriate under the circumstances. As discussed under "Proposal-Board Considerations" in the Proxy Statement/Prospectus the investment advisory and administrative fee payable to Mitchell Hutchins during periods in which Plus Fund is using leverage will be higher than when it is not doing so because the fee is calculated as a percentage of Managed Assets, which include assets purchased with leverage. Plus Fund may borrow through reverse repurchase transactions or engage in dollar rolls. In a reverse repurchase agreement, the Fund sells securities to a bank, securities dealer or one of their respective affiliates and agrees to repurchase them on demand or on a specified future date and at a specified price. Reverse repurchase agreements involve the risk that the buyer of the securities sold by Plus Fund might be unable to deliver them when the Fund seeks to repurchase. If the buyer of the securities under the reverse repurchase agreement files for bankruptcy or becomes insolvent, the buyer or a trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligation to repurchase the securities, and the Fund's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending that decision. In a dollar roll, Plus Fund sells mortgage-backed or other securities for delivery on the next regular settlement date and, simultaneously, contracts to purchase substantially identical securities for delivery on a later settlement date. Plus Fund may also issue preferred stock or debt securities. The issuance of debt securities or preferred stock by the Fund would involve offering expenses and other costs, including dividends or interest payments, which would be borne by the stockholders. The terms of any borrowing, other Fund indebtedness or preferred stock issued by Plus Fund may impose asset coverage requirements, dividend limitations and voting right requirements on the Fund that are more stringent than those imposed under the Investment Company Act of 1940 ("1940 Act"). Such terms also may impose special restrictions on Plus Fund's portfolio composition or on its use of various investment techniques or strategies. The Fund also might be further limited in any of these respects by guidelines established by any Rating Agencies that issue ratings for debt securities or preferred stock issued by the Fund. These requirements may have an adverse effect on Plus Fund. For example, limitations on Plus Fund's ability to pay dividends or make other distributions could impair its ability to maintain its qualification for treatment as a regulated investment company for federal tax purposes. The 1940 Act imposes a 200% asset coverage requirement with respect to any preferred stock that Plus Fund may issue. Immediately after any such issuance, Plus Fund's total assets (including the proceeds of the preferred stock and of any indebtedness constituting senior securities) must be at least equal to 200% of the liquidation value of the outstanding preferred stock (i.e., such liquidation value may not exceed 50% of Plus Fund's total assets, including the proceeds of the preferred stock and any outstanding indebtedness constituting senior securities). Following the issuance of preferred stock, Plus 2 Fund would not be permitted to declare any cash dividend or other distribution on its shares or purchase any of the shares (through tender offers or otherwise), unless it would satisfy this 200% asset coverage after deducting the amount of the dividend, other distribution, or share purchase price, as the case may be. If Plus Fund were to have senior securities in the form of both indebtedness and preferred stock outstanding at the same time, it would be subject to the 300% asset coverage requirement imposed by the 1940 Act (a fund is not permitted to incur indebtedness constituting senior securities unless immediately thereafter the fund has total assets, including the proceeds of the indebtedness, at least equal to 300% of the amount of the indebtedness) with respect to the amount of the indebtedness and the 200% asset coverage requirement with respect to the preferred stock. Under the 1940 Act, holders of any outstanding preferred stock, voting separately as a single class, must be entitled to elect at least two members of Plus Fund's Board of Directors. Also, under certain circumstances, the holders of any senior securities that are in default may be entitled to elect a majority of the Board. For further information about leveraging, see "Comparison of Principal Risk Factors--Primary Differences in the Investment Risks of the Funds" in the Proxy Statement/Prospectus." YIELD FACTORS AND CREDIT RATINGS Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's"), and other nationally recognized statistical rating organizations (collectively with Moody's and S&P, "Rating Agencies") are private services that provide ratings of the credit quality of debt obligations (bonds) and certain other securities. A description of the range of ratings assigned to bonds by S&P and Moody's is included in this SAI. The Fund may use these ratings in determining whether to purchase, sell or hold a security. Credit ratings attempt to evaluate the safety of principal and interest payments, but they do not evaluate the volatility of a bond's value or its liquidity and do not guarantee the performance of the issuer. Rating Agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer's current financial condition may be better or worse than the rating indicates. There is a risk that Rating Agencies may downgrade a bond's rating. Subsequent to a bond's purchase by the Fund, it may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. The Fund may use these ratings in determining whether to purchase, sell or hold a security. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, bonds with the same maturity, interest rate and rating may have different market prices. Mitchell Hutchins will consider such an event in determining whether the Fund should continue to hold the bond. Securities ratings are based largely on the issuer's historical financial condition and the Rating Agencies' analysis at the time of rating. Securities ratings are not a guarantee of quality and may be lowered after a Fund has acquired the security. Also, Rating Agencies may fail to make timely changes in credit ratings in response to subsequent events. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. The rating assigned to a security by a Rating Agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. In addition to ratings assigned to individual bond issues, Mitchell Hutchins analyzes interest rate trends and developments that may affect individual issuers, including factors such as liquidity, profitability and asset quality. The yields on bonds are dependent on a variety of factors, including general money market conditions, general conditions in the bond market, the financial condition of the issuer, the size of the offering, the maturity of the obligation and its rating. There is a wide variation in the quality of bonds, both within a particular classification and between classifications. An issuer's obligations under its bonds are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of bond holders or other creditors of an issuer; litigation or other conditions may also adversely affect the power or ability of issuers to meet their obligations for the payment of interest and principal on their bonds. Investment grade bonds are rated in one of the four highest rating categories by Moody's or S&P, comparably rated by another Rating Agency or, if unrated, determined by Mitchell Hutchins to be of comparable quality. Moody's considers bonds rated Baa (its lowest investment grade rating) to have speculative characteristics. This means that changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case for higher-rated bonds. High yield bonds (commonly known as "junk bonds") are non-investment grade bonds. This means they are rated Ba or lower by Moody's, BB or lower by S&P, 3 comparably rated by another Rating Agency or determined by Mitchell Hutchins to be of comparable quality. The Fund's investments in non-investment grade bonds entail greater risk than its investments in higher-rated bonds. Non-investment grade bonds are considered predominantly speculative with respect to the issuer's ability to pay interest and repay principal and may involve significant risk exposure to adverse conditions. Non-investment grade bonds generally offer a higher current yield than that available for investment grade issues; however, they involve higher risks, in that they are especially sensitive to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress which could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, such issuers may not have more traditional methods of financing available to them and may be unable to repay debt at maturity by refinancing. The risk of loss due to default by such issuers is significantly greater because such securities frequently are unsecured by collateral and will not receive payment until more senior claims are paid in full. The market for non-investment grade bonds, especially those of foreign issuers, has expanded rapidly in recent years, which has been a period of generally expanding growth and lower inflation. These securities will be susceptible to greater risk when economic growth slows or reverses and when inflation increases or deflation occurs. This has been reflected in recent volatility in emerging market securities. In the past, many lower rated bonds experienced substantial price declines reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields on lower rated bonds rose dramatically. However, those higher yields did not reflect the value of the income stream that holders of such securities expected. Rather, they reflected the risk that holders of such securities could lose a substantial portion of their value due to the issuers' financial restructurings or defaults by the issuers. There can be no assurance that those declines will not recur. The market for non-investment grade bonds generally is thinner and less active than that for higher quality securities, which may limit the Fund's ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of non-investment grade bonds, especially in a thinly traded market. SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES GENERAL. The costs attributable to and risks of foreign investing frequently are higher than those attributable to domestic investing; this is particularly true with respect to emerging capital markets. For example, the cost of maintaining custody of foreign securities exceeds custodian costs for domestic securities, and transaction and settlement costs of foreign investing also frequently are higher than those attributable to domestic investing. Costs associated with the exchange of currencies also make foreign investing more expensive than domestic investing. Investment income, and gains realized, on certain foreign securities may be subject to foreign withholding or other government taxes that could reduce the return of these securities. Tax treaties between the United States and foreign countries, however, may reduce or eliminate the amount of foreign tax to which the Fund would be subject. In addition, substantial limitations may exist in certain countries with respect to the Fund's ability to repatriate investment capital or the proceeds of sales of securities. Moreover, individual foreign economies may differ favorably or 4 unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. In those European countries that have begun using the Euro as a common currency unit, individual national economies may be adversely affected by the inability of national governments to use monetary policy to address their own economic or political concerns. Securities of many foreign companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. From time to time foreign securities may be difficult to liquidate rapidly without significantly depressing the price of such securities. Transactions in foreign securities may be subject to less efficient settlement practices. Foreign securities trading practices, including those involving securities settlement where the Fund's assets may be released prior to receipt of payment, may expose the Fund to increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer. Legal remedies for defaults and disputes may have to be pursued in foreign courts, whose procedures differ substantially from those of U.S. courts. Foreign markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have failed to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in the temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. Emerging market countries typically have economic and political systems that are less fully developed and can be expected to be less stable than those of developed countries. Emerging market countries may have policies that restrict investment by foreigners, and there is a higher risk of government expropriation or nationalization of private property. The possibility of low or nonexistent trading volume in the securities of companies in emerging markets also may result in a lack of liquidity and in price volatility. Issuers in emerging markets typically are subject to a greater degree of change in earnings and business prospects than are companies in developed markets. INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the securities markets of several emerging market countries is restricted or controlled to varying degrees. These restrictions may limit the Fund's investment in these countries and may increase its expenses. For example, certain countries may require governmental approval prior to investments by foreign persons in a particular company or industry sector or limit investment by foreign persons to only a specific class of securities of a company, which may have less advantageous terms (including price) than securities of the company available for purchase by nationals. Certain countries may restrict or prohibit investment opportunities in issuers or industries deemed important to national interests. In addition, the repatriation of both investment income and capital from some emerging market countries is subject to restrictions, such as the need for certain government consents. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the Fund's operations. These restrictions may in the future make it undesirable to invest in the countries to which they apply. In addition, if there is a deterioration in a country's balance of payments or for other reasons, a country may impose restrictions on foreign capital remittances abroad. The Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation, as well as by the application to it of other restrictions on investments. 5 If, because of restrictions on repatriation or conversion, the Fund were unable to distribute substantially all of its net investment income and capital gains within applicable time periods, the Fund could be subject to federal income and excise taxes that would not otherwise be incurred and could cease to qualify for the favorable tax treatment afforded to regulated investment companies under the Internal Revenue Code. In such case, it would become subject to federal income tax on all of its net income and gains. To avoid these adverse consequences, the Fund might be required to distribute amounts that are greater than the total amount of cash it actually receives. These distributions would have to be made from the Fund's cash assets or, if necessary, from the proceeds of sales of portfolio securities. The Fund would not be able to purchase additional securities with cash used to make such distributions, and its current income and the value of its shares might ultimately be reduced as a result. SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many emerging market countries may be subject to a greater degree of social, political and economic instability than is the case in the United States. Any change in the leadership or policies of these countries may halt the expansion of or reverse any liberalization of foreign investment policies now occurring. Such instability may result from, among other things, the following: (i) authoritarian governments or military involvement in political and economic decision making, and changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection. Such social, political and economic instability could significantly disrupt the financial markets in those countries and elsewhere and could adversely affect the value of the Fund's assets. In addition, there may be the possibility of asset expropriations or future confiscatory levels of taxation affecting the Fund. The economies of many emerging markets are heavily dependent upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners, principally the United States, Japan, China and the European Union. The enactment by the United States or other principal trading partners of protectionist trade legislation, reduction of foreign investment in the local economies and general declines in the international securities markets could have a significant adverse effect upon the securities markets of these countries. In addition, the economies of some countries are vulnerable to weakness in world prices for their commodity exports. Many foreign and emerging market securities are not registered with the Securities and Exchange Commission ("SEC"), and the issuers of those securities are not subject to SEC reporting requirements. Accordingly, there may be less publicly available information concerning foreign issuers of securities held by the Fund than is available concerning U.S. companies. Disclosure and regulatory standards in many respects are less stringent in emerging market countries than in U.S. and other major markets. There also may be a lower level of monitoring and regulation of emerging markets and the activities of investors in such markets, and enforcement of existing regulations may be extremely limited. Foreign companies and, in particular, companies in smaller and emerging capital markets are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. In addition, existing laws and regulations are often inconsistently applied. As legal systems in some of the emerging market countries develop, 6 foreign investors may be adversely affected by new laws and regulations, changes to existing laws and regulations and preemption of local laws and regulations by national laws. In circumstances where adequate laws exist, it may not be possible to obtain swift and equitable enforcement of the law. SOVEREIGN DEBT. Sovereign debt includes bonds that are issued by foreign governments or their agencies, instrumentalities or political subdivisions or by foreign central banks. Sovereign debt also may be issued by quasi-governmental entities that are owned by foreign governments but are not backed by their full faith and credit or general taxing powers. Investment in sovereign debt involves special risks. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal and/or interest when due in accordance with the terms of such debt, and the funds may have limited legal recourse in the event of a default. Sovereign debt differs from debt obligations issued by private entities in that, generally, remedies for defaults must be pursued in the courts of the defaulting party. Legal recourse is, therefore, limited. Political conditions, especially a sovereign entity's willingness to meet the terms of its debt obligations, are of considerable significance. Also, there can be no assurance that the holders of commercial bank loans to the same sovereign entity may not contest payments to the holders of sovereign debt in the event of default under commercial bank loan agreements. A sovereign debtor's willingness or ability to pay interest and repay principal in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward principal international lenders and the political constraints to which a sovereign debtor may be subject. A country whose exports are concentrated in a few commodities could be vulnerable to a decline in the international price of such commodities. Increased protectionism on the part of a country's trading partners, or political changes in those countries, could also adversely affect its exports. Such events could diminish a country's trade account surplus, if any, or the credit standing of a particular local government or agency. Another factor bearing on the ability of a country to repay sovereign debt is the level of the country's international reserves. Fluctuations in the level of these reserves can affect the amount of foreign exchange readily available for external debt payments and, thus, could have a bearing on the capacity of the country to make payments on its sovereign debt. The occurrence of political, social or diplomatic changes in one or more of the countries issuing sovereign debt could adversely affect the Fund's investments. Political changes or a deterioration of a country's domestic economy or balance of trade may affect the willingness of countries to service their sovereign debt. While the Fund's portfolio is managed in a manner that is intended to minimize the exposure to such risks, there can be no assurance that adverse political changes will not cause the Fund to suffer a loss of interest or principal on any of its sovereign debt holdings. To the extent that a country has a current account deficit (generally when exports of merchandise and services are less than the country's imports of merchandise and services plus net transfers (e.g., gifts of currency and goods) to foreigners), it will need to depend on loans from foreign governments, multilateral organizations or private commercial banks, aid payments from 7 foreign governments and inflows of foreign investment. The access of a country to these forms of external funding may not be certain, and a withdrawal of external funding could adversely affect the capacity of a government to make payments on its obligations. In addition, the cost of servicing debt obligations can be affected by a change in international interest rates, since the majority of these obligations carry interest rates that are adjusted periodically based upon international rates. With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. Some emerging market countries have from time to time declared moratoria on the payment of principal and interest on external debt. Some emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements or converting outstanding principal and unpaid interest to Brady Bonds, and obtaining new credit to finance interest payments. Holders of sovereign debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to sovereign debtors. The interests of holders of sovereign debt could be adversely affected in the course of restructuring arrangements or by certain other factors referred to below. Furthermore, some of the participants in the secondary market for sovereign debt may also be directly involved in negotiating the terms of these arrangements and may, therefore, have access to information not available to other market participants. Obligations arising from past restructuring agreements may affect the economic performance and political and social stability of certain issuers of sovereign debt. There is no bankruptcy proceeding by which sovereign debt on which a sovereign has defaulted may be collected in whole or in part. Foreign investment in certain sovereign debt is restricted or controlled to varying degrees. These restrictions or controls may at times limit or preclude foreign investment in such sovereign debt and increase the costs and expenses of the Fund. Certain countries in which the Fund may invest require governmental approval prior to investments by foreign persons, limit the amount of investment by foreign persons in a particular issuer, limit the investment by foreign persons only to a specific class of securities of an issuer that may have less advantageous rights than the classes available for purchase by domiciliaries of the countries or impose additional taxes on foreign investors. Certain issuers may require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if a deterioration occurs in a country's balance of payments the country could impose temporary restrictions on foreign capital remittances. The Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments. Investing in local markets may require the Fund to adopt special procedures, seek local government approvals or take other actions, each of which may involve additional costs to the Fund. ASSET-BACKED SECURITIES Asset-backed securities are similar to mortgage-backed securities, except that the underlying assets are different. These underlying assets may be nearly any type of financial asset or receivable, such as motor vehicle installment sales contracts, home equity loans, leases of various types of real and personal property and receivables from revolving credit (credit card) agreements. Such assets are securitized through the use of trusts or special purpose corporations. Payments or distributions of principal and income may be guaranteed up to a certain amount and for a certain time period by a letter of credit or pool insurance policy issued by a financial institution unaffiliated with the issuer, or other credit enhancements may be present. MORTGAGE-BACKED SECURITIES Mortgage-backed securities are debt or pass-through securities that are backed by specific types of assets. These securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property and include single- and multi-class pass-through securities and collateralized mortgage obligations. The U.S. government 8 mortgage-backed securities are issued or guaranteed as to the payment of principal and interest (but not as to market value) by Ginnie Mae (also known as the Government National Mortgage Association), Fannie Mae (also known as the Federal National Mortgage Association) or Freddie Mac (also known as the Federal Home Loan Mortgage Corporation) or other government-sponsored enterprises. Other domestic mortgage-backed securities are sponsored or issued by private entities, generally originators of and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities (collectively "Private Mortgage Lenders"). Payments of principal and interest (but not the market value) of such private mortgage-backed securities may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any government guarantee of the underlying mortgage assets but with some form of non-government credit enhancement. Foreign mortgage-backed securities may be issued by mortgage banks and other private or governmental entities outside the United States and are supported by interests in foreign real estate. New types of mortgage- and asset-backed securities are developed and marketed from time to time and, consistent with its investment limitations, Plus Fund expects to invest in those new types of mortgage- and asset- backed securities that Mitchell Hutchins believes may assist in achieving its investment objectives. Similarly, the Fund may invest in mortgage-backed securities issued by new or existing governmental or private issuers other than those identified herein. GINNIE MAE CERTIFICATES. Ginnie Mae guarantees certain mortgage pass-through certificates ("Ginnie Mae certificates") that are issued by Private Mortgage Lenders and that represent ownership interests in individual pools of residential mortgage loans. These securities are designed to provide monthly payments of interest and principal to the investor. Timely payment of interest and principal is backed by the full faith and credit of the U.S. government. Each mortgagor's monthly payments to his lending institution on his residential mortgage are "passed through" to certificate holders such as the Fund. Mortgage pools consist of whole mortgage loans or participations in loans. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. Lending institutions that originate mortgages for the pools are subject to certain standards, including credit and other underwriting criteria for individual mortgages included in the pools. FANNIE MAE CERTIFICATES. Fannie Mae facilitates a national secondary market in residential mortgage loans insured or guaranteed by U.S. government agencies and in privately insured or uninsured residential mortgage loans (sometimes referred to as "conventional mortgage loans" or "conventional loans") through its mortgage purchase and mortgage-backed securities sales activities. Fannie Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae certificates"), which represent pro rata shares of all interest and principal payments made and owed on the underlying pools. Fannie Mae guarantees timely payment of interest and principal on Fannie Mae certificates. The Fannie Mae guarantee is not backed by the full faith and credit of the U.S. government. FREDDIE MAC CERTIFICATES. Freddie Mac also facilitates a national secondary market for conventional residential and U.S. government-insured mortgage loans through its mortgage purchase and mortgage-backed securities sales activities. Freddie Mac issues two types of mortgage pass-through securities: mortgage participation certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool. Freddie Mac generally guarantees timely monthly payment of interest on PCs and the ultimate payment of principal, but it also has a PC program under which it guarantees timely payment of both principal and interest. GMCs also represent a pro rata interest in a pool of mortgages. These instruments, however, pay interest semiannually and return principal once a year in guaranteed minimum payments. The Freddie Mac guarantee is not backed by the full faith and credit of the U.S. government. 9 PRIVATE MORTGAGE-BACKED SECURITIES. Mortgage-backed securities issued by Private Mortgage Lenders are structured similarly to the pass-through certificates and collateralized mortgage obligations ("CMOs") issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed securities may be supported by pools of U.S. government or agency insured or guaranteed mortgage loans or by other mortgage-backed securities issued by a government agency or instrumentality, but they generally are supported by pools of conventional (I.E., non-government guaranteed or insured) mortgage loans. Since such mortgage-backed securities normally are not guaranteed by an entity having the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they normally are structured with one or more types of credit enhancement. See "--TYPES OF CREDIT ENHANCEMENt" below. These credit enhancements do not protect investors from changes in market value. COMMERCIAL MORTGAGE-BACKED SECURITIES. Commercial mortgage-backed securities generally are multi-class debt or pass-through certificates secured by mortgage loans on commercial properties. The market for commercial mortgage-backed securities developed more recently, and in terms of total outstanding principal amount of issues is relatively small, compared to the market for residential single-family mortgage-backed securities. In addition, commercial lending generally is viewed as exposing the lender to a greater risk of loss than one- to four-family residential lending. Commercial lending, for example, typically involves larger loans to single borrowers or groups of related borrowers than residential one- to four-family mortgage loans. In addition, the repayment of loans secured by income producing properties typically is dependent upon the successful operation of the related real estate project and the cash flow generated therefrom. Consequently, adverse changes in economic conditions and circumstances are more likely to have an adverse impact on mortgage-backed securities secured by loans on commercial properties than on those secured by loans on residential properties. COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS. CMOs are debt obligations that are collateralized by mortgage loans or mortgage pass-through securities (such collateral collectively being called "Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage pass-through securities are interests in trusts that are comprised of Mortgage Assets and that have multiple classes similar to those in CMOs. Unless the context indicates otherwise, references herein to CMOs include multi-class, mortgage pass-through securities. Payments of principal of, and interest on, the Mortgage Assets (and in the case of CMOs, any reinvestment income thereon) provide the funds to pay debt service on the CMOs or to make scheduled distributions on the multi-class mortgage pass-through securities. CMOs involve special risks, and evaluating them requires special knowledge. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMO, also referred to as a "tranche," is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrued on all classes of a CMO (other than any principal-only class) on a monthly, quarterly or semiannual basis. The principal and interest on the Mortgage Assets may be allocated among the several classes of a CMO in many ways. In one structure, payments of principal, including any principal prepayments, on the Mortgage Assets are applied to the classes of a 10 CMO in the order of their respective stated maturities or final distribution dates so that no payment of principal will be made on any class of the CMO until all other classes having an earlier stated maturity or final distribution date have been paid in full. In some CMO structures, all or a portion of the interest attributable to one or more of the CMO classes may be added to the principal amounts attributable to such classes, rather than passed through to certificate holders on a current basis, until other classes of the CMO are paid in full. Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class, which, as with other CMO structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. Some CMO classes are structured to pay interest at rates that are adjusted in accordance with a formula, such as a multiple or fraction of the change in a specified interest rate index, so as to pay at a rate that will be attractive in certain interest rate environments but not in others. For example, an inverse floating rate CMO class pays interest at a rate that increases as a specified interest rate index decreases but decreases as that index increases. For other CMO classes, the yield may move in the same direction as market interest rates--I.E., the yield may increase as rates increase and decrease as rates decrease--but may do so more rapidly or to a greater degree. The market value of such securities generally is more volatile than that of a fixed rate obligation. Such interest rate formulas may be combined with other CMO characteristics. For example, a CMO class may be an inverse interest-only class on which the holders are entitled to receive no payments of principal and are entitled to receive interest at a rate that will vary inversely with a specified index or a multiple thereof. TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors on the underlying assets to make payments, mortgage- and asset-backed securities may contain elements of credit enhancement. Such credit enhancement falls into two categories: (1) liquidity protection and (2) protection against losses resulting after default by an obligor on the underlying assets and collection of all amounts recoverable directly from the obligor and through liquidation of the collateral. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets (usually the bank, savings association or mortgage banker that transferred the underlying loans to the issuer of the security), to ensure that the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting after default and liquidation ensures ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor, from third parties, through various means of structuring the transaction or through a combination of such approaches. The Fund will not pay any additional fees for such credit enhancement, although the existence of credit enhancement may increase the price of a security. Credit enhancements do not provide protection against changes in the market value of the security. Examples of credit enhancement arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of "spread 11 accounts" or "reserve funds" (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and "over-collateralization" (where the scheduled payments on, or the principal amount of, the underlying assets exceed that required to make payment of the securities and pay any servicing or other fees). The degree of credit enhancement provided for each issue generally is based on historical information regarding the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that anticipated could adversely affect the return on an investment in such a security. INVESTMENTS IN SUBORDINATED SECURITIES. The Fund may invest in subordinated classes of senior-subordinated securities ("Subordinated Securities"). Subordinated Securities have no governmental guarantee, and are subordinated in some manner as to the payment of principal and/or interest to the holders of more senior mortgage- or asset-backed securities arising out of the same pool of assets. The holders of Subordinated Securities typically are compensated with a higher stated yield than are the holders of more senior securities. On the other hand, Subordinated Securities typically subject the holder to greater risk than senior securities and tend to be rated in a lower rating category, and frequently a substantially lower rating category, than the senior securities issued in respect of the same pool of assets. Subordinated Securities generally are likely to be more sensitive to changes in prepayment and interest rates, and the market for such securities may be less liquid than is the case for traditional fixed-income securities and senior mortgage- or asset-backed securities. SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of mortgage-and asset-backed securities differ from those of traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans or other obligations generally may be prepaid at any time. Prepayments on a pool of mortgage loans are influenced by a variety of economic, geographic, social and other factors, including changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity in the mortgaged properties and servicing decisions. Generally, however, prepayments on fixed-rate mortgage loans will increase during a period of falling interest rates and decrease during a period of rising interest rates. Similar factors apply to prepayments on asset-backed securities, but the receivables underlying asset-backed securities generally are of a shorter maturity and thus less likely to experience substantial prepayments. Such securities, however, often provide that for a specified time period the issuers will replace receivables in the pool that are repaid with comparable obligations. If the issuer is unable to do so, repayment of principal on the asset-backed securities may commence at an earlier date. Mortgage- and asset-backed securities may decrease in value as a result of increases in interest rates and may benefit less than other fixed-income securities from declining interest rates because of the risk of prepayment. The rate of interest on mortgage-backed securities is lower than the interest rates paid on the mortgages included in the underlying pool due to the annual fees paid to the servicer of the mortgage pool for passing through monthly payments to certificate holders and to any guarantor, and due to any yield retained by the issuer. Actual yield to the holder may vary from the coupon rate, even if adjustable, if the mortgage-backed securities are purchased or traded in the secondary market at a premium or discount. In addition, there is normally some delay between the time the issuer receives mortgage payments from the servicer and the time the issuer makes the payments on the mortgage-backed securities, and this delay reduces the effective yield to the holder of such securities. Yields on pass-through securities are typically quoted by investment dealers and vendors based on the maturity of the underlying instruments and the associated average life assumption. The average life of pass-through pools 12 varies with the maturities of the underlying mortgage loans. A pool's term may be shortened by unscheduled or early payments of principal on the underlying mortgages. Because prepayment rates of individual pools vary widely, it is not possible to predict accurately the average life of a particular pool. In the past, a common industry practice was to assume that prepayments on pools of fixed rate 30-year mortgages would result in a 12-year average life for the pool. At present, mortgage pools, particularly those with loans with other maturities or different characteristics, are priced on an assumption of average life determined for each pool. In periods of declining interest rates, the rate of prepayment tends to increase, thereby shortening the actual average life of a pool of mortgage-backed securities. Conversely, in periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the actual average life of the pool. The value of securities with longer average lives generally fluctuates more widely in response to changes in interest rates than the value of securities with shorter average lives. However, these effects may not be present, or may differ in degree, if the mortgage loans in the pools have adjustable interest rates or other special payment terms, such as a prepayment charge. Actual prepayment experience may cause the yield of mortgage-backed securities to differ from the assumed average life yield. Reinvestment of prepayments may occur at lower interest rates than the original investment, thus adversely affecting the yield of the Fund. The market for privately issued mortgage- and asset-backed securities is smaller and less liquid than the market for U.S. government mortgage-backed securities. The markets for foreign mortgage-backed securities are substantially smaller than U.S. markets. Foreign mortgage-backed securities are structured differently than domestic mortgage-backed securities, but they normally present substantially similar risks, as well as the other risks normally associated with foreign securities. CMO classes may be specially structured in a manner that provides any of a wide variety of investment characteristics, such as yield, effective maturity and interest rate sensitivity. As market conditions change, however, and especially during periods of rapid or unanticipated changes in market interest rates, the attractiveness of some CMO classes and the ability of the structure to provide the anticipated investment characteristics may be significantly reduced. These changes can result in volatility in the market value, and in some instances reduced liquidity, of the CMO class. Inverse floating rate CMO classes may be extremely volatile. These classes pay interest at a rate that decreases when a specified index of market rates increases. During 1994, the value and liquidity of many mortgage-backed securities declined sharply due primarily to increases in interest rates. There can be no assurance that such declines will not recur. The market value of certain mortgage-backed securities can be extremely volatile and these securities may become illiquid. Mitchell Hutchins seeks to manage Plus Fund's investments in mortgage-backed securities so that the volatility of the Fund's portfolio, taken as a whole, is consistent with the Fund's investment objectives. If market interest rates or other factors that affect the volatility of securities held by the Fund change in ways that Mitchell Hutchins does not anticipate, the Fund's ability to meet its investment objectives may be reduced. ADDITIONAL INFORMATION ON ADJUSTABLE RATE MORTGAGE- AND FLOATING RATE MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage-backed securities (sometimes referred to as "ARM securities") are mortgage-backed securities that represent a right to receive interest payments at a rate that is adjusted to reflect the interest earned on a pool of mortgage loans bearing variable or adjustable rates of interest (such mortgage loans are referred to as "ARMs"). Floating rate mortgage-backed securities are classes of mortgage-backed securities that have been structured to represent the right to receive interest payments at rates that fluctuate in accordance with an index but that generally are supported by pools comprised of fixed-rate mortgage loans. Because the interest rates on ARM and floating rate mortgage-backed securities are reset in response to changes in a specified market index, the values of such securities tend to be less sensitive to interest rate fluctuations than the values of fixed-rate securities. As a result, during periods of rising interest rates, ARM securities generally do not decrease in value as much as fixed rate securities. Conversely, during periods of declining rates, ARM securities generally do not increase in value as much as fixed rate securities. ARM securities represent a right to receive interest payments at a rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs generally specify that the borrower's mortgage interest rate may not be adjusted above a specified lifetime maximum rate or, in some cases, below a minimum lifetime rate. In addition, certain ARMs specify limitations on the maximum amount by which the mortgage interest rate may adjust for any single adjustment period. ARMs also may limit changes in the maximum amount by which the borrower's monthly payment may adjust for any single adjustment period. In the event that a monthly payment is not sufficient to pay the interest accruing on the ARM, any such excess interest is added to the mortgage loan ("negative amortization"), which is repaid through future payments. If the monthly payment exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment that would have been necessary to amortize the outstanding principal balance over the remaining term of the loan, the excess reduces the principal balance of the ARM. Borrowers under ARMs experiencing negative amortization may take longer to build up their equity in the underlying property and may be more likely to default. 13 ARMs also may be subject to a greater rate of prepayments in a declining interest rate environment. For example, during a period of declining interest rates, prepayments on ARMs could increase because the availability of fixed mortgage loans at competitive interest rates may encourage mortgagors to "lock-in" at a lower interest rate. Conversely, during a period of rising interest rates, prepayments on ARMs might decrease. The rate of prepayments with respect to ARMs has fluctuated in recent years. The rates of interest payable on certain ARMs, and, therefore, on certain ARM securities, are based on indices, such as the one-year constant maturity Treasury rate, that reflect changes in market interest rates. Others are based on indices, such as the 11th District Federal Home Loan Bank Cost of Funds Index ("COFI"), that tend to lag behind changes in market interest rates. The values of ARM securities supported by ARMs that adjust based on lagging indices tend to be somewhat more sensitive to interest rate fluctuations than those reflecting current interest rate levels, although the values of such ARM securities still tend to be less sensitive to interest rate fluctuations than fixed-rate securities. Floating rate mortgage-backed securities are classes of mortgage-backed securities that have been structured to represent the right to receive interest payments at rates that fluctuate in accordance with an index but that generally are supported by pools comprised of fixed-rate mortgage loans. As with ARM securities, interest rate adjustments on floating rate mortgage-backed securities may be based on indices that lag behind market interest rates. Interest rates on floating rate mortgage-backed securities generally are adjusted monthly. Floating rate mortgage-backed securities are subject to lifetime interest rate caps, but they generally are not subject to limitations on monthly or other periodic changes in interest rates or monthly payments. DURATION Duration is a measure of the expected life of a fixed income security that was developed as a more precise alternative to the concept "term to maturity." Duration incorporates the debt security's yield, coupon interest payments, final maturity and call features into one measure and is one of the fundamental tools used by Mitchell Hutchins in portfolio selection and yield curve positioning for the Fund's debt investments. Traditionally, a debt security's "term to maturity" has been used as a proxy for the sensitivity of the security's price to changes in interest rates (which is the "interest rate risk" or "volatility" of the security). However, "term to maturity" measures only the time until a debt security provides for a final payment, taking no account of the pattern of the security's payments prior to maturity. Duration takes the length of the time intervals between the present time and the time that the interest and principal payments are scheduled or, in the case of a callable debt security, expected to be made, and weights them by the present values of the cash to be received at each future point in time. For any fixed income security with interest payments occurring prior to the payment of principal, duration is always less than maturity. For example, depending upon its coupon and the level of market yields, a Treasury note with a remaining maturity of five years might have a duration of 4.5 years. For mortgage-backed and other securities that are subject to prepayments, put or call features or adjustable coupons, the difference between the remaining stated maturity and the duration is likely to be much greater. Duration allows Mitchell Hutchins to make certain predictions as to the effect that changes in the level of interest rates will have on the value of the 14 Fund's portfolio of debt securities. For example, when the level of interest rates increases by 1%, a debt security having a positive duration of three years generally will decrease by approximately 3%. Thus, if Mitchell Hutchins calculates the duration of the Fund's portfolio of debt securities as three years, it normally would expect the portfolio to change in value by approximately 3% for every 1% change in the level of interest rates. However, various factors, such as changes in anticipated prepayment rates, qualitative considerations and market supply and demand, can cause particular securities to respond somewhat differently to changes in interest rates than indicated in the above example. Moreover, in the case of mortgage-backed and other complex securities, duration calculations are estimates and are not precise. This is particularly true during periods of market volatility. Accordingly, the net asset value of a fund's portfolio of debt securities may vary in relation to interest rates by a greater or lesser percentage than indicated by the above example. Futures, options and options on futures have durations that, in general, are closely related to the duration of the securities that underlie them. Holding long futures or call option positions will lengthen a security's duration by approximately the same amount as would holding an equivalent amount of the underlying securities. Short futures or put options have durations roughly equal to the negative duration of the securities that underlie these positions, and have the effect of reducing portfolio duration by approximately the same amount as would selling an equivalent amount of the underlying securities. There are some situations in which the standard duration calculation does not properly reflect the interest rate exposure of a security. For example, floating and variable rate securities often have final maturities of ten or more years; however, their interest rate exposure corresponds to the frequency of the coupon reset. Another example where the interest rate exposure is not properly captured by the standard duration calculation is the case of mortgage-backed securities. The stated final maturity of such securities is generally 30 years, but current prepayment rates are critical in determining the securities' interest rate exposure. In these and other similar situations, Mitchell Hutchins uses more sophisticated analytical techniques that incorporate the economic life of a security into the determination of its duration and, therefore, its interest rate exposure. CONVERTIBLE SECURITIES The Fund may invest in convertible securities, which are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for a specified amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest generally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Convertible securities have unique investment characteristics in that they generally (1) have higher yields than common stocks, but lower yields than comparable non-convertible securities, (2) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (3) provide the potential for capital appreciation if the market price of the underlying common stock increases. Most convertible securities currently are issued by U.S. companies, although a substantial Eurodollar convertible 15 securities market has developed, and the markets for convertible securities denominated in foreign currencies are increasing. While no securities investment is without some risk, investments in convertible securities generally entail less risk than the issuer's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. Before conversion, convertible securities have characteristics similar to non-convertible debt securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers. Convertible securities rank senior to common stock in a corporation's capital structure but are usually subordinated to comparable non-convertible securities. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. In addition, a convertible security generally will sell at a premium over its conversion value determined by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. A convertible security might be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. If a convertible security held by the Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Any of these actions could have an adverse effect on the Fund's ability to achieve its investment objective. REPURCHASE AGREEMENTS Repurchase agreements are transactions in which the Fund purchases securities or other obligations from a bank or securities dealer (or its affiliate) and simultaneously commits to resell those securities to the seller at an agreed-upon date or upon demand and at a price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities. The Fund maintains custody of the underlying securities prior to their repurchase; thus, the obligation of the seller to pay the repurchase price on the date agreed to is, in effect, secured by such securities. If the value of such securities becomes less than the repurchase price, plus any agreed-upon additional amount, the seller will be required to provide additional collateral so that at all times the collateral will be at least equal to the repurchase price, plus any agreed-upon additional amount. The difference between the total amount to be received upon repurchase of the securities and the price paid by the Fund upon acquisition is accrued as interest and included in the Fund's net investment income. Repurchase agreements carry certain risks not associated with direct investments in securities, including possible declines in the market value of the underlying securities and delays and costs to the Fund if the other party to 16 the repurchase agreement becomes insolvent. The Fund intends to enter into repurchase agreements only with banks, securities dealers or their respective affiliates in transactions believed by Mitchell Hutchins to present minimal credit risks in accordance with guidelines established by the Fund's Board. Mitchell Hutchins receives and monitors the creditworthiness of such institutions under the Board's general supervision. ILLIQUID SECURITIES The Fund may invest without limit in illiquid securities, which for this purpose includes, among other things, purchased over-the-counter ("OTC") options, repurchase agreements maturing in more than seven days, certain loan participations and assignments, and restricted securities other than those Mitchell Hutchins has determined are liquid pursuant to guidelines established by the Fund's Board of Directors. Restricted securities are not registered under the Securities Act of 1933 ("1933 Act") and may be sold only in privately negotiated transactions or other exempted transactions or after a 1933 Act registration statement has become effective. Where registration is required, the Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities also include those that are subject to restrictions contained in the securities laws of other countries. However, not all restricted securities are illiquid. To the extent that foreign securities are freely tradable in the country where they are principally traded they are not considered illiquid, even if they are restricted securities in the United States. In addition, an institutional market has developed for certain securities that are not registered under the 1933 Act, including private placements, repurchase agreements, commercial paper, foreign securities and corporate bonds and notes. Institutional investors generally will not seek to sell these instruments to the general public, but instead will often depend either on an efficient institutional market in which such unregistered securities can be readily resold or on an issuer's ability to honor a demand for repayment. Therefore, the fact that there are contractual or legal restrictions on resale to the general public or certain institutions is not dispositive of the liquidity of such investments. Institutional markets for restricted securities also have developed as a result of Rule 144A. Rule 144A establishes a "safe harbor" from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers, providing both readily ascertainable values for restricted securities and the ability to liquidate an investment. Such markets include automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. An insufficient number of qualified buyers interested in purchasing Rule 144A-eligible restricted securities held by the Fund, however, could affect adversely the marketability of such portfolio securities, and the Fund might be unable to dispose of such securities promptly or at favorable prices. The Fund may sell OTC options and, in connection therewith, segregate assets or cover its obligations with respect to OTC options written by the Fund. The assets used as cover for OTC options written by the Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the 17 Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. MUNICIPAL OBLIGATIONS Municipal obligations generally include debt obligations issued to obtain funds for various public purposes as well as certain industrial development bonds issued by or on behalf of public authorities. Municipal obligations are classified as general obligation bonds, revenue bonds and notes. General obligation bonds are supported by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenue derived from a particular facility or class of facilities, or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from general taxing power. Industrial development bonds, in most cases, are revenue bonds that generally do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are issued. Notes are short-term instruments which are obligations of the issuing municipalities or agencies and normally are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues. Municipal obligations include municipal lease/purchase agreements which are similar to installment purchase contracts for property or equipment issued by municipalities. Municipal obligations bear fixed, floating or variable rates of interest. Certain municipal obligations are subject to redemption at a date earlier than their stated maturity pursuant to call options, which may be separated from the related municipal obligations and purchased and sold separately. The Fund also may acquire call options on specific municipal obligations. The Fund generally would purchase these call options to protect the Fund from the issuer of the related municipal obligation redeeming, or other holder of the call option from calling away, the municipal obligation before maturity. While, in general, municipal obligations are tax-exempt securities having relatively low yields as compared to taxable, non-municipal obligations of similar quality, certain municipal obligations are taxable obligations, offering yields comparable to, and in some cases greater than, the yields available on other permissible Fund investments. The portion of dividends received by stockholders from the Fund that is attributable to interest income received by the Fund from municipal obligations will not be exempt from federal income tax. PRIVATE PLACEMENTS The Fund may invest in securities that are sold in private placement transactions between their issuers and their purchasers and that are neither listed on an exchange nor traded in the OTC secondary market. In many cases, privately placed securities will be subject to contractual or legal restrictions on transfer. As a result of the absence of a public trading market, privately placed securities may in turn be less liquid and more difficult to value than publicly traded securities. Although privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales could, due to illiquidity, be less than those originally paid by the Fund or less than if such securities were more widely traded. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and 18 other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. MONEY MARKET INSTRUMENTS The Fund may invest in money market instruments which may include securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, obligations of foreign and domestic banks or other depository institutions, commercial paper, short-term corporate obligations and repurchase agreements secured by any of the foregoing. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and the drawer to pay the face amount of the instrument upon maturity. Other short-term bank obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. Other short-term corporate obligations include variable amount master demand notes, which are obligations that permit the Fund to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Fund, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. There generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. SHORT SALES "AGAINST THE BOX" The Fund may engage in short sales of securities it owns or has the right to acquire at no added cost through conversion or exchange of other securities it owns (short sales "against the box"). To make delivery to the purchaser in a short sale, the executing broker borrows the securities being sold short on behalf of the Fund, and the Fund is obligated to replace the securities borrowed at a date in the future. When the Fund sells short, it establishes a margin account with the broker effecting the short sale and deposits collateral with the broker. In addition, the Fund maintains, in a segregated account with its custodian, securities that could be used to cover the short sale. The Fund incurs transaction costs, including interest expense, in connection with opening, maintaining and closing short sales "against the box." The Fund might make a short sale "against the box" in order to hedge against market risks when Mitchell Hutchins believes that the price of a security may decline, thereby causing a decline in the value of a security owned by the Fund or a security convertible into or exchangeable for a security owned by the Fund. In such case, any loss in the Fund's long position after the short sale should be reduced by a corresponding gain in the short position. Conversely, any gain in the long position after the short sale should be reduced by a corresponding loss in the short position. The extent to which gains or losses in the long position are reduced will depend upon the amount of the securities sold short relative to the amount of the securities the Fund owns, either directly or indirectly, and in the case where the Fund owns convertible securities, changes in the investment values or conversion premiums of such securities. 19 INVESTMENT LIMITATIONS FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations cannot be changed without the affirmative vote of the lesser of (a) more than 50% of the outstanding shares of the Fund or (b) 67% or more of the shares present at a stockholders' meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. If a percentage restriction is adhered to at the time of an investment or transaction, a later increase or decrease in percentage resulting from a change in values of portfolio securities or the amount of total assets will not be considered a violation of any of the following limitations or of any of the Fund's investment policies. The Fund will not: (1) purchase securities of any one issuer if, as a result, more than 5% of the Fund's total assets would be invested in securities of that issuer or the Fund would own or hold more than 10% of the outstanding voting securities of that issuer, except that up to 25% of the Fund's total assets may be invested without regard to this limitation, and except that this limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies and instrumentalities or to securities issued by other investment companies. The following interpretation applies to, but is not a part of, this fundamental restriction: Mortgage-and asset-backed securities will not be considered to have been issued by the same issuer by reason of the securities having the same sponsor, and mortgage- and asset-backed securities issued by a finance or other special purpose subsidiary that are not guaranteed by the parent company will be considered to be issued by a separate issuer from the parent company. (2) purchase any security if, as a result of that purchase, 25% or more of the Fund's total assets would be invested in securities of issuers having their principal business activities in the same industry, except that this limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or to municipal securities. (3) issue senior securities or borrow money, except as permitted under the 1940 Act and then not in excess of 33 1/3% of the Fund's total assets (including the amount of the senior securities issued but reduced by any liabilities not constituting senior securities) at the time of the issuance or borrowing, except that the Fund may borrow up to an additional 5% of its total assets (not including the amount borrowed) for temporary or emergency purposes. (4) make loans, except through loans of portfolio securities or through repurchase agreements, provided that for purposes of this restriction, the acquisition of bonds, debentures, other debt securities or instruments, or participations or other interests therein and investments in government obligations, commercial paper, certificates of deposit, bankers' acceptances or similar instruments will not be considered the making of a loan. 20 (5) engage in the business of underwriting securities of other issuers, except to the extent that the Fund might be considered an underwriter under the federal securities laws in connection with its disposition of portfolio securities. (6) purchase or sell real estate, except that investments in securities of issuers that invest in real estate and investments in mortgage-backed securities, mortgage participations or other instruments supported by interests in real estate are not subject to this limitation, and except that the Fund may exercise rights under agreements relating to such securities, including the right to enforce security interests and to hold real estate acquired by reason of such enforcement until that real estate can be liquidated in an orderly manner. (7) purchase or sell physical commodities unless acquired as a result of owning securities or other instruments, but the Fund may purchase, sell or enter into financial options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments. Except for the investment restrictions listed above and the Fund's investment objectives, the other investment policies described in the Proxy Statement/Prospectus and this Statement of Additional Information are not fundamental and may be changed with approval of the Board of Directors and without a stockholder vote. HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS Mitchell Hutchins may use a variety of financial instruments ("Derivative Instruments"), including certain options, futures contracts (sometimes referred to as "futures"), options on futures contracts and forward currency contracts to attempt to hedge the Fund's portfolio and to attempt to enhance income or to realize gains. Mitchell Hutchins also may attempt to hedge the Fund's portfolio through the use of swap transactions. The Fund may enter into transactions using one or more types of Derivatives Instruments under which the full value of its portfolio is at risk. Under normal circumstances, however, the Fund's use of these instruments will place at risk a much smaller portion of its assets. The Fund may use the following Derivative Instruments: OPTIONS ON DEBT AND EQUITY SECURITIES AND FOREIGN CURRENCIES. A call option is a short-term contract pursuant to which the purchaser of the option, in return for a premium, has the right to buy the security or currency underlying the option at a specified price at any time during the term, or upon the expiration, of the option. The writer of a call option, who receives the premium, has the obligation, upon exercise of the option, to deliver the underlying security or currency against payment of the exercise price. A put option is a similar contract that gives its purchaser, in return for a premium, the right to sell the underlying security or currency at a specified price during the option term. The writer of a put option, who receives the premium, has the obligation, upon timely exercise of the option, to buy the underlying security or currency at the exercise price. OPTIONS ON INDICES OF DEBT AND EQUITY SECURITIES. A securities index assigns relative values to the securities included in the index and fluctuates with changes in the market values of such securities. Index options operate in the same way as more traditional options except that exercises of index options 21 are effected with cash payments and do not involve delivery of securities. Thus, upon exercise of an index option, the purchaser will realize, and the writer will pay, an amount based on the difference between the exercise price and the closing price of the index. DEBT AND EQUITY SECURITY INDEX FUTURES CONTRACTS. A securities index futures contract is a bilateral agreement pursuant to which one party agrees to accept, and the other party agrees to make, delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the securities comprising the index is made; generally contracts are closed out prior to the expiration date of the contract. DEBT SECURITY AND CURRENCY FUTURES CONTRACTS. A debt security futures contract is a bilateral agreement pursuant to which one party agrees to accept, and the other party agrees to make, delivery of the specific type of debt security or currency called for in the contract at a specified future time and at a specified price. Although such futures contracts by their terms call for actual delivery or acceptance of debt securities or currency, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to options on securities, except that an option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell a security or currency, at a specified price at any time during the option term. Upon exercise of the option, the delivery of the futures position to the holder of the option will be accompanied by delivery of the accumulated balance that represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the future. The writer of an option, upon exercise, will assume a short position in the case of a call, and a long position in the case of put. FORWARD CURRENCY CONTRACTS. A forward currency contract involves an obligation to purchase or sell a specific currency at a specified future date, which may be any fixed number of days from the contract date agreed upon by the parties, at a price set at the time the contract is entered into. GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS Hedging strategies using Derivative Instruments can be broadly categorized as "short hedges" and "long hedges." A short hedge is a purchase or sale of a Derivative Instrument intended partially or fully to offset potential declines in the value of one or more investments held in the Fund's portfolio. Thus, in a short hedge, the Fund takes a position in a Derivative Instrument whose price is expected to move in the opposite direction of the price of the investment being hedged. For example, the Fund might purchase a put option on a security to hedge against a potential decline in the value of that security. If the price of the security declined below the exercise price of the put, the Fund could exercise the put and thus limit its loss below the exercise price to the premium paid plus transaction costs. In the alternative, because the value of the put option can be expected to increase as the value of the underlying security declines, the Fund might be able to close out the put option and realize a gain to offset the decline in the value of the security. 22 Conversely, a long hedge is a purchase or sale of a Derivative Instrument intended partially or fully to offset potential increases in the acquisition cost of one or more investments that the Fund intends to acquire. Thus, in a long hedge, the Fund takes a position in a Derivative Instrument whose price is expected to move in the same direction as the price of the prospective investment being hedged. For example, the Fund might purchase a call option on a security it intends to purchase in order to hedge against an increase in the cost of the security. If the price of the security increased above the exercise price of the call, the Fund could exercise the call and thus limit its acquisition cost to the exercise price plus the premium paid and transaction costs. Alternatively, the Fund might be able to offset the price increase by closing out an appreciated call option and realizing a gain. Derivative Instruments on securities generally are used to hedge against price movements in one or more particular securities positions that the Fund owns or intends to acquire. Derivative Instruments on indices, in contrast, generally are used to hedge against price movements in broad market sectors in which the Fund has invested or expects to invest. Derivative Instruments on debt securities may be used to hedge either individual securities or broad fixed income market sectors. The use of Derivative Instruments is subject to applicable regulations of the SEC, the several options and futures exchanges upon which they are traded and the Commodity Futures Trading Commission ("CFTC"). In addition, the Fund's ability to use Derivative Instruments may be limited by tax considerations. See "Taxation." In addition to the products, strategies and risks described below and in the Proxy Statement/Prospectus, Mitchell Hutchins may discover additional opportunities in connection with Derivative Instruments and with hedging, income and gain strategies. These new opportunities may become available as regulatory authorities broaden the range of permitted transactions and as new Derivative Instruments and techniques are developed. Mitchell Hutchins may utilize these opportunities for the Fund to the extent that they are consistent with the Fund's investment objective and permitted by its investment limitations and applicable regulatory authorities. The Fund's Proxy Statement/Prospectus or Statement of Additional Information will be supplemented to the extent that new products or techniques involve materially different risks than those described below or in the Proxy Statement/Prospectus. SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS The use of Derivative Instruments involves special considerations and risks, as described below. Risks pertaining to particular Derivative Instruments are described in the sections that follow. (1) Successful use of most Derivative Instruments depends upon Mitchell Hutchins' ability to predict movements of the overall securities, currency or interest rate markets, which requires different skills than predicting changes in the prices of individual securities. While Mitchell Hutchins is experienced in the use of Derivative Instruments, there can be no assurance that any particular hedging strategy adopted will succeed. (2) There might be imperfect correlation, or even no correlation, between price movements of a Derivative Instrument and price movements of the investments being hedged. For example, if the value of a Derivative Instrument 23 used in a short hedge increased by less than the decline in value of the hedged investment, the hedge would not be fully successful. Such a lack of correlation might occur due to factors affecting the markets in which Derivative Instruments are traded rather than the value of the investments being hedged. The effectiveness of hedges using Derivative Instruments on indices will depend on the degree of correlation between price movements in the index and price movements in the securities being hedged. (3) Hedging strategies, if successful, can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. For example, if the Fund entered into a short hedge because Mitchell Hutchins projected a decline in the price of a security in the Fund's portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Derivative Instrument. Moreover, if the price of the Derivative Instrument declined by more than the increase in the price of the security, the Fund could suffer a loss. In either such case, the Fund would have been in a better position had it not hedged at all. (4) As described below, the Fund might be required to maintain assets as "cover," maintain segregated accounts or make margin payments when it takes positions in Derivative Instruments involving obligations to third parties (i.e., Derivative Instruments other than purchased options). If the Fund were unable to close out its positions in such Derivative Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair the Fund's ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time. The Fund's ability to close out a position in a Derivative Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of a counterparty to enter into a transaction closing out the position. Therefore, there is no assurance that any position in a Derivative Instrument can be closed out at a time and price that is favorable to the Fund. COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS Transactions using Derivative Instruments, other than purchased options, expose the Fund to an obligation to another party. The Fund will not enter into any such transactions unless it owns either (1) an offsetting ("covered") position in securities, currencies or other options, forward currency contracts or futures contracts or (2) cash or liquid securities, with a value sufficient at all times to cover its potential obligations to the extent not covered as provided in (1) above. The Fund will comply with SEC guidelines regarding cover for such transactions and will, if the guidelines so require, set aside cash or liquid securities in a segregated account with its custodian in the prescribed amount. Assets used as cover or held in a segregated account cannot be sold while the position in the corresponding Derivative Instrument is open, unless they are replaced with similar assets. As a result, the committing of a large portion of the Fund's assets to cover positions or to segregated accounts could impede portfolio management or the Fund's ability to meet current obligations. OPTIONS 24 The Fund may purchase put and call options, and write (sell) covered put and call options, on debt and equity securities and foreign currencies. The purchase of call options may serve as a long hedge, and the purchase of put options may serve as a short hedge. Writing covered put or call options can enable the Fund to enhance income by reason of the premiums paid by the purchases of such options. In addition, writing covered put options may serve as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the market price of the security underlying a covered put option declines to less than the exercise price of the option, minus the premium received, the Fund would expect to suffer a loss. Writing covered call options may serve as a limited short hedge, because declines in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security or currency appreciates to a price higher than the exercise price of the call option, it can be expected that the option will be exercised and the Fund will be obligated to sell the security or currency at less than its market value. If the covered call option is an OTC option, the securities or other assets used as cover would be considered illiquid to the extent described under the section entitled "Investment Objectives and Policies--Illiquid Securities." The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, the historical price volatility of the underlying investment and general market conditions. Options normally have expiration dates of up to nine months. Generally, OTC options on foreign currencies and debt securities are European-style options. This means that the option is only exercisable immediately prior to its expiration. This is in contrast to American-style options, which are exercisable at any time prior to the expiration date of the option. There are also other types of options exercisable on certain specified dates before expiration. Options that expire unexercised have no value. The Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, the Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, the Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the Fund to realize profits or limit losses on an option position prior to its exercise or expiration. The Fund may purchase or write both exchange-traded and OTC options. Exchange markets for options on debt securities and foreign currencies exist but are relatively new and these instruments are primarily traded on the OTC market. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed which, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between the Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when the Fund purchases or writes an OTC option, it relies on the counterparty to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by the Fund as well as the loss of any expected benefit of the transaction. 25 The Fund's ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. The Fund intends to purchase or write only those exchange-traded options for which there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. Although the Fund will enter into OTC options only with counterparties that are expected to be capable of entering into closing transactions with the Fund, there is no assurance that the Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, the Fund might be unable to close out an OTC option position at any time prior to its expiration. The Fund will enter into OTC option transactions only with counterparties deemed creditworthy by Mitchell Hutchins. If the Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by the Fund could cause material losses because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised. The Fund may purchase and write put and call options on indices of debt and equity securities in much the same manner as the more traditional options discussed above, except that index options may serve as a hedge against overall fluctuations in the debt securities market (or market sectors) rather than anticipated increases or decreases in the value of a particular security. FUTURES The Fund may purchase and sell interest rate, debt and equity security index and foreign currency futures and options thereon. The purchase of futures or call options thereon may serve as a long hedge, and the sale of futures or the purchase of put options thereon may serve as a short hedge. Writing covered call options on futures contracts may serve as a limited short hedge, using a strategy similar to that used for writing covered call options on securities, currencies or indices. Similarly, writing put options on futures contracts may serve as a limited long hedge. Futures strategies also can be used to manage the average duration of the Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of the Fund's portfolio, the Fund may sell an interest rate futures contract or a call option thereon, or purchase a put option on that futures contract. If Mitchell Hutchins wishes to lengthen the average duration of the Fund's portfolio, the Fund may buy an interest rate or futures contract or a call option thereon or sell a put option thereon. No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract the Fund is required to deposit with the futures broker through which the transaction was effected, "initial margin" consisting of cash, obligations of the United States or obligations that are fully guaranteed as to principal and interest by the United States, in an amount generally equal to 10% or less of the contract value. Margin must also be deposited when writing a call option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the 26 nature of a performance bond or good-faith deposit that is returned to the Fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action. Subsequent "variation margin" payments are made to and from the futures broker daily as the value of the futures position varies, a process known as "marking to market." Variation margin does not involve borrowing, but rather represents a daily settlement of the Fund's obligations with respect to or from a futures broker. When the Fund purchases an option on a future, the premium paid plus transaction costs is all that is at risk. In contrast, when the Fund purchases or sells a futures contract or writes a put or call option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If the Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous. Holders and writers of futures positions and options on futures can enter into offsetting closing transactions, similar to closing transactions on options, by selling or purchasing, respectively, an instrument identical to the instrument held or written. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. The Fund intends to enter into such transactions only on exchanges or boards of trade where there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist for a particular contract at a particular time. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures or related option can vary from the previous day's settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions. If the Fund were unable to liquidate a futures or options position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, the Fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account. Certain characteristics of the futures market might increase the risk that movements in the prices of futures contracts or related options might not correlate perfectly with movements in the prices of the investments being hedged. For example, all participants in the futures and options markets are subject to daily variation margin calls and might be compelled to liquidate futures or related options positions whose prices are moving unfavorably to avoid being subject to further calls. These liquidations could increase price volatility of the instruments and distort the normal price relationship between the futures or options and the investments being hedged. Also, because initial margin deposit requirements in the futures market are less onerous than margin requirements in the securities markets, there might be increased participation by speculators in the futures markets. This participation also might cause temporary price distortions. In addition, activities of large traders in both the futures and securities markets involving arbitrage, "program trading" and other investment strategies might result in temporary price distortions. FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS 27 The Fund may use options on foreign currencies, as described above, and forward currency contracts, as described below, to hedge against movements in the values of the foreign currencies in which portfolio securities are denominated and to attempt to enhance income or to realize gains. Currency hedges can protect against price movements in a security the Fund owns or intends to acquire that are attributable to changes in the value of the currency in which it is denominated. Such hedges do not, however, protect against price movements in the securities that are attributable to other causes. The Fund might seek to hedge against changes in the value of a particular currency when no Derivative Instruments on that currency are available or such Derivative Instruments are more expensive than certain other Derivative Instruments. In such cases, the Fund may hedge against price movements in that currency by entering into transactions using Derivative Instruments on another currency or basket of currencies, the value of which Mitchell Hutchins believes will have a positive correlation to the value of the currency being hedged. The risk that movements in the price of the Derivative Instrument will not correlate perfectly with movements in the price of the currency being hedged is magnified when this strategy is used. The value of Derivative Instruments on foreign currencies depends on the value of the underlying currency relative to the U.S. dollar. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such Derivative Instruments, the Fund could be disadvantaged by having to deal in the odd-lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots. There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Quotation information generally is representative of very large transactions in the interbank market and thus might not reflect odd-lot transactions where rates might be less favorable. The interbank market in foreign currencies is a global, round-the-clock market. To the extent the U.S. options or futures markets are closed while the markets for the underlying currencies remain open, significant price and rate movements might take place in the underlying markets that cannot be reflected in the markets for the Derivative Instruments until they reopen. Settlement of Derivative Instruments involving foreign currencies might be required to take place within the country issuing the underlying currency. Thus, the Fund might be required to accept or make delivery of the underlying foreign currency in accordance with any U.S. or foreign regulations regarding the maintenance of foreign banking arrangements by U.S. residents and might be required to pay any fees, taxes and charges associated with such delivery assessed in the issuing country. COMBINED TRANSACTIONS The Fund may enter into multiple transactions, including multiple options transactions, multiple futures transactions and any combination of futures and options transactions (each a "component" transaction), instead of a single Derivative Instrument, as part of a single or combined strategy when, in the opinion of Mitchell Hutchins, it is in the best interests of the Fund to do so. A combined transaction will usually contain elements of risk that are present in 28 each of its component transactions. Although combined transactions are normally entered into based on Mitchell Hutchins' judgment that the combined strategies will reduce risk or otherwise more effectively achieve the desired portfolio management goal, it is possible that the combination will instead increase such risks or hinder achievement of the portfolio management objective. GUIDELINE FOR FUTURES AND OPTIONS To the extent that the Fund enters into futures contracts, options on futures positions and options on foreign currencies traded on a commodities exchange, which are not for BONA FIDE hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums on these positions (excluding the amount by which options are "in-the-money") may not exceed 5% of the Fund's net assets. This guideline may be modified by the Fund's Board of Directors without a stockholder vote. Adoption of this guideline does not limit the percentage of the Fund's assets at risk to 5%. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency. Such transactions may serve as long hedges--for example, the Fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Fund intends to acquire. Forward currency contract transactions may also serve as short hedges--for example, the Fund may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security denominated in a foreign currency. As noted above, the Fund also may seek to hedge against changes in the value of a particular currency by using forward contracts on another foreign currency or a basket of currencies, the value of which Mitchell Hutchins believes will have a positive correlation to the values of the currency being hedged. In addition, the Fund may use forward currency contracts to shift its exposure to foreign currency fluctuations from one country to another. For example, if the Fund owned securities denominated in a foreign currency and Mitchell Hutchins believed that currency would decline relative to another currency, it might enter into a forward contract to sell an appropriate amount of the first foreign currency, with payment to be made in the second foreign currency. Transactions that use two foreign currencies are sometimes referred to as "cross hedging." Use of a different foreign currency magnifies the risk that movements in the price of the Derivative Instrument will not correlate or will correlate unfavorably with the foreign currency being hedged. The cost to the Fund of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When the Fund enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of any expected benefit of the transaction. As in the case with futures contracts, holders and writers of forward currency contracts can enter into offsetting closing transactions, similar to closing transactions on futures, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Secondary markets 29 generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Fund will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, the Fund might be unable to close out a forward currency contract at any time prior to maturity. In either event, the Fund would continue to be subject to market risk with respect to the position, and would continue to be required to maintain a position in the securities or currencies that are the subject of the hedge or to maintain cash or liquid securities in a segregated account. The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward currency contract has been established. Thus, the Fund might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts or maintain a net exposure to such contracts only if (1) the consummation of the contracts would not obligate the Fund to deliver an amount of foreign currency in excess of the value of the position being hedged by such contracts or (2) the Fund maintains cash or liquid securities in a segregated account in an amount not less than the value of its total assets committed to the consummation of the contract and not covered as provided in (1) above, as marked to market daily. SWAP TRANSACTIONS The Fund may enter into interest rate swap transactions. Swap transactions include caps, floors and collars. Interest rate swap transactions involve an agreement between two parties to exchange payments that are based, respectively, on variable and fixed rates of interest and that are calculated on the basis of a specified amount of principal ("notional principal amount") for a specified period of time. Interest rate cap and floor transactions involve an agreement between two parties in which one party agrees to make payments to its counterparty when a designated market interest rate goes above (in the case of a cap) or below (in the case of a floor) a designated level on predetermined dates or during a specified time period. Interest rate collar transactions involve an agreement between two parties in which payments are made when a designated market interest rate either goes above a designated level or goes below a designated floor level on predetermined dates or during a specified time period. The Fund would enter into swap transactions to preserve a return or spread on a particular investment or portion of its portfolio or to protect against any increase in the price of securities it anticipates purchasing at a later date. The Fund would use these transactions as a hedge and not as a speculative investment. Interest rate swap transactions are subject to risks comparable to those described above with respect to other Derivative Instruments. The Fund may enter into interest rate swaps, caps, floors and collars on either an asset-based or liability-based basis, depending on whether it is hedging its assets or its liabilities, and will usually enter into interest rate 30 swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Inasmuch as these swap transactions are entered into for good faith hedging purposes and inasmuch as segregated accounts will be established with respect to such transactions, Mitchell Hutchins and the Fund believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis and appropriate Fund assets having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by a custodian that satisfies the requirements of the 1940 Act. The Fund also will establish and maintain such segregated accounts with respect to its total obligations under any interest rate swaps that are not entered into on a net basis and with respect to any interest rate caps, floors and collars that are written by the Fund. The Fund will enter into swap transactions only with banks, securities dealers and their respective affiliates believed by Mitchell Hutchins to present minimal credit risks in accordance with guidelines established by the Fund's Board. If there is a default by the other party to such a transaction, the Fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. DIRECTORS AND OFFICERS The Fund pays its Directors who are not "interested persons" of the Fund $1,000 annually and up to $150 for each board meeting and for each separate meeting of a board committee. The chairmen of the audit and contract review committees of individual funds within the PaineWebber fund complex each receive additional compensation aggregating $15,000 annually from the relevant funds. All Directors are reimbursed for any expenses incurred in attending meetings. Because Mitchell Hutchins performs substantially all of the services necessary for the operation of the Fund, the Fund requires no employees. No officer, director or employee of PaineWebber or Mitchell Hutchins presently receives any compensation from the Fund for acting as a director or officer. The table below includes certain information relating to the compensation of the Fund's Directors. COMPENSATION TABLE^ AGGREGATE TOTAL COMPENSATION COMPENSATION FROM THE FUND AND THE FUND NAME OF PERSONS POSITION FROM THE FUND* COMPLEX** Richard Q. Armstrong, Director $1,327 [ ] Richard R. Burt, Director $1,297 [ ] Meyer Feldberg, Director $1,816 [ ] George W. Gowen, Director $1,327 [ ] Frederic Malek, Director $1,327 [ ] Carl W. Schafer, Director $1,327 [ ] 31 - -------- ^ Only independent members of the Board of Directors are compensated by the Fund and identified above; Directors who are "interested persons," as defined in the 1940 Act, do not receive compensation. * Represents fees paid to each director during the fiscal period ended May 31, 1999 by the Fund. ** Represents total compensation paid to each Director during the calendar year ended December 31, 1999; no fund within the complex has a bonus, pension, profit sharing or retirement plan. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of _____, 2000, Cede & Co. (the nominee for The Depository Trust Company) owned of record ____ shares or ___% of the outstanding shares. To the knowledge of the Fund, no person is the beneficial owner of 5% or more of its shares. As of ______, 2000, the Directors and officers of the Fund beneficially owned less than 1% of the outstanding Fund shares. INVESTMENT ADVISORY ARRANGEMENTS Mitchell Hutchins is the Fund's investment adviser and administrator pursuant to a contract dated June 22, 1998 ("Advisory Contract"). Mitchell Hutchins is a wholly owned asset management subsidiary of PaineWebber, which is a wholly owned subsidiary of Paine Webber Group Inc., a publicly held financial services holding company. Mitchell Hutchins provides investment advisory and portfolio management services to investment companies, pension funds, and other institutional, corporate and individual clients. Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous investment program for the Fund and makes investment decisions and places orders to buy, sell or hold particular securities. As administrator, Mitchell Hutchins supervises all matters relating to the operation of the Fund and obtain for it corporate, administrative and clerical personnel, office space, equipment and services, including arranging for the periodic preparation, updating, filing and dissemination of proxy materials, tax returns and reports to the Fund's Board, stockholders and regulatory authorities. The Advisory Contract between Mitchell Hutchins and the Fund provides Mitchell Hutchins with a fee, computed weekly and payable monthly, in an amount equal to the annual rate of 0.70% of the Fund's average weekly total assets minus liabilities other than the aggregate indebtedness constituting leverage ("Managed Assets"). During periods in which the Fund is utilizing leverage, the investment advisory and administrative fee payable to Mitchell Hutchins will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Fund's Managed Assets, including those purchased with leverage. In addition to the payments to Mitchell Hutchins under the Advisory Contract described above, the Fund pays certain other costs, including (1) the costs (including brokerage commissions) of securities purchased or sold by the 32 Fund and any losses incurred in connection therewith; (2) fees payable to and expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational and offering expenses of the Fund, whether or not advanced by Mitchell Hutchins; (4) filing fees and expenses relating to the registration and qualification of the Fund's shares and the Fund under federal securities laws and/or state laws and maintaining such registration and qualifications; (5) fees and salaries payable to Fund's directors and officers who are not interested persons of the Fund or Mitchell Hutchins; (6) all expenses incurred in connection with the Fund's directors' services, including travel expenses; (7) taxes (including any income or franchise taxes) and governmental fees; (8) costs of any liability, uncollectible items of deposit and any other insurance or fidelity bonds; (9) any costs, expenses or losses arising out of a liability of or claims for damages or other relief asserted against the Fund for violation of any law; (10) legal, accounting and auditing expenses, including legal fees of special counsel for those directors of the Fund who are not interested persons of the Fund; (11) charges of custodians, transfer agents and other agents (including any lending agent); (12) costs of preparing share certificates; (13) expenses of setting in type and printing prospectuses and supplements thereto, statements of additional information and supplements thereto, reports and proxy materials for existing shareholders; (14) costs of mailing prospectuses and supplements thereto, statements of additional information and supplements thereto, reports and proxy materials to existing shareholders; (15) any extraordinary expenses (including fees and disbursements of counsel, costs of actions, suits or proceedings to which the Fund is a party and the expenses the Fund may incur as a result of its legal obligation to provide indemnification to its officers, directors, agents and shareholders) incurred by the Fund; (16) fees, voluntary assessments and other expenses incurred in connection with membership in investment company organizations; (17) costs of mailing and tabulating proxies and costs of meetings of shareholders, the Board and any committees thereof; (18) the costs of investment company literature and other publications provided by the Fund to its directors and officers; (19) costs of mailing, stationery and communications equipment; (20) expenses incident to any dividend reinvestment plan; (21) changes and expenses of any outside pricing service used to value portfolio securities; (22) interest on borrowings of the Fund; (23) fees and expenses of listing and maintaining any listing of the Fund's shares on any national securities exchange; and (24) costs and expenses (including rating agency fees) associated with the issuance of any preferred stock. The Advisory Contract was approved by the Fund's Board and by a majority of the Directors who are not parties to the Advisory Contract or interested persons of any such party ("Independent Directors") on May 13, 1998 and by its initial shareholder on June 22, 1998. Unless sooner terminated, the Advisory Contract will continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually (1) by a majority vote of the Independent Directors cast in person at a meeting called for the purpose of voting on such approval; and (2) by the Board or by vote of a majority of the Fund's outstanding voting securities. Under the Advisory Contract, Mitchell Hutchins is not liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the Advisory Contract, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in the performance of its duties or from reckless disregard of its duties and obligations under the Advisory Contract. The Advisory Contract is terminable by 33 vote of the Board or by the holders of a majority of the outstanding voting securities of the Fund, at any time without penalty, on 60 days' written notice to Mitchell Hutchins. The Advisory Contract may also be terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The Advisory Contract terminates automatically upon its assignment. Mitchell Hutchins personnel may invest in securities for their own accounts pursuant to a code of ethics that describes the fiduciary duty owed to shareholders of the PaineWebber funds and other Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors, officers and employees, that establishes procedures for personal investing and that restricts certain transactions. For example, employee accounts generally must be maintained at PaineWebber, personal trades in most securities require pre-clearance and short-term trading and participation in initial public offerings generally are prohibited. In addition, the code of ethics puts restrictions on the timing of personal investing in relation to trades by PaineWebber funds and other Mitchell Hutchins advisory clients. For the fiscal year ended May 31, 1999, the Fund paid or accrued to Mitchell Hutchins investment advisory and administration fees totaling $322, 661. CUSTODIAN AND INDEPENDENT AUDITORS State Street Bank and Trust Company ("State Street"), One Heritage Drive, North Quincy, Massachusetts 02171, serves as custodian of the Fund's assets. As custodian of the Fund, State Street responsibility's include the safekeeping of securities, cash and other assets of the Fund; settling portfolio purchases and sales; identifying and collecting portfolio income; and performing portfolio accounting functions. State Street also employs foreign sub-custodians approved by the Board of Directors, in accordance with applicable requirements under the 1940 Act, to provide custody of the Fund's foreign assets. Ernst & Young LLP ("Ernst & Young"), 787 Seventh Avenue, New York, New York 10019, serves as the Fund's independent auditors. As independent auditors, Ernst & Young reviews the books and records of the Fund. Moreover, it advises management on accounting issues. Ernst and Young also issues audit reports to the Board of Directors, stockholders, and the SEC. PORTFOLIO TRANSACTIONS Subject to policies established by the Board of Directors, Mitchell Hutchins is responsible for the execution of the Fund's portfolio transactions and the allocation of brokerage transactions. In executing portfolio transactions, Mitchell Hutchins seeks to obtain the best net results for the Fund, taking into account such factors as the price (including the applicable dealer spread or brokerage commission), size of order, difficulty of execution and operational facilities of the firm involved. Generally, debt securities are traded on the OTC market on a "net" basis without a stated commission through dealers acting for their own account and not as brokers. Prices paid to dealers in principal transactions generally include a "spread," which is the difference between the prices at which the dealer is willing to purchase and sell a specific security at that time. The Fund has no obligation to deal with any broker or group of brokers in the execution of portfolio transactions. The Fund contemplates that, consistent with obtaining the best net results, brokerage transactions may be conducted through Mitchell Hutchins or any of its affiliates, including PaineWebber. The Fund's Board of Directors adopted procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to Mitchell Hutchins 34 or any of its affiliates are reasonable and fair. Specific provisions in the Advisory Contract authorize Mitchell Hutchins and any affiliate thereof that is a member of a national securities exchange to effect portfolio transactions for the Fund on such exchange and to retain compensation in connection with such transactions. Any such transactions will be effected and related compensation paid only in accordance with applicable SEC regulations. Transactions in futures contracts are executed through futures commission merchants ("FCMs") who receive brokerage commissions for their services. The Fund's procedures in selecting FCMs to execute the Fund's transactions in futures contracts, including procedures permitting the use of Mitchell Hutchins and its affiliates, are similar to those in effect with respect to brokerage transactions in securities. For the fiscal year ended May 31, 1999, the Fund did not pay any commissions to FCMs. Consistent with the Fund's interests and subject to the review of the Fund's Board of Directors, Mitchell Hutchins may cause the Fund to purchase and sell portfolio securities through brokers who provide the Fund with research, analysis, advice and similar services. In return for such services, the Fund may pay to those brokers a higher commission than may be charged by other brokers, provided that Mitchell Hutchins determines in good faith that such commission is reasonable in terms either of that particular transaction or of the overall responsibility of Mitchell Hutchins to the Fund and its other clients and that the total commissions paid by the Fund will be reasonable in relation to the benefits to the Fund over the long term. For purchases or sales with broker-dealer firms which act as principal, Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive certain research or execution services in connection with these transactions, Mitchell Hutchins will not purchase securities at a higher price or sell securities at a lower price than would otherwise be paid if no weight was attributed to the services provided by the executing dealer. Moreover, Mitchell Hutchins does not enter into any explicit soft dollar arrangements relating to principal transactions and does not receive in principal transactions the types of services which could be purchased for hard dollars. Mitchell Hutchins may engage in agency transactions in OTC equity and debt securities in return for research and execution services. These transactions are entered into only in compliance with procedures ensuring that the transaction (including commissions) is at least as favorable as it would have been if effected directly with a market-maker that did not provide research or execution services. These procedures include Mitchell Hutchins receiving multiple quotes from dealers before executing the transaction on an agency basis. Research services furnished by dealers or brokers with or through which the Fund effects securities transactions may be used by Mitchell Hutchins in advising other funds or accounts and, conversely, research services furnished to Mitchell Hutchins by dealers or brokers in connection with other funds or accounts Mitchell Hutchins advisers may be used by Mitchell Hutchins in advising the Fund. Information and research received from such brokers or dealers will be in addition to, and not in lieu of, the services required to be performed by Mitchell Hutchins under the Advisory Contract. Investment decisions for the Fund and for other investment accounts managed by Mitchell Hutchins are made independently of each other in light of differing considerations for the various accounts. The same investment decision, however, may occasionally be made for the Fund and one or more such accounts. In such cases, simultaneous transactions are inevitable. Purchases or sales are then averaged as to price and allocated between the Fund and such other 35 account(s) as to amount according to a formula deemed equitable to the Fund and such account(s). While in some cases this practice could have a detrimental effect upon the price or value of the security as far as the Fund is concerned, or upon its ability to complete its entire order, in other cases it is believed that coordination and the ability to participate in volume transactions are beneficial to the Fund. The Fund does not purchase securities that are offered in underwritings in which PaineWebber, Mitchell Hutchins or any of their affiliates is a member of the underwriting or selling group, except pursuant to procedures adopted by the Fund's Board of Directors pursuant to Rule 10f-3 under the 1940 Act. Among other things, these procedures require that the commission or spread paid in connection with such a purchase be reasonable and fair, that the purchase be at not more than the public offering price prior to the end of the first business day after the date of the public offering and that PaineWebber, Mitchell Hutchins and their affiliates not participate in or benefit from the sale to the Fund. For the fiscal year ended May 31, 1999, Mitchell Hutchins did not direct any brokerage commissions to brokers chosen because they provided research and analysis. For the fiscal year ended May 31, 1999, Managed High Yield Plus paid no brokerage commissions. PORTFOLIO TURNOVER The Fund's portfolio turnover rate was 52% for the fiscal period June 26, 1998 (commencement of operations) to May 31, 1999. Portfolio turnover may vary from year to year and will not be a limiting factor when Mitchell Hutchins deems portfolio changes appropriate. Higher portfolio turnover (100% or more) will result in higher Fund expenses, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of securities and on reinvestment in other securities. The portfolio turnover rate is calculated by dividing the lesser of a Fund's annual sales or purchases of portfolio securities (exclusive of purchases or sales of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the long-term securities in the portfolio during the year. NET ASSET VALUE OF SHARES The net asset value of the Fund's shares is determined weekly as of the close of regular trading on the New York Stock Exchange, Inc. ("NYSE") on the last day of the week on which the NYSE is open for trading. The net asset value of the shares also is determined monthly at the close of regular trading on the NYSE on the last day of the month on which the NYSE is open for trading. The net asset value per share is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received and earned discount) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time. When market quotations are readily available, the Fund's debt securities are valued based upon those quotations. When market quotations for options and futures positions held by the Fund are readily available, those positions are valued based upon such quotations. Market quotations generally are not available for options traded in the OTC market. When market quotations for options or futures positions are not readily available, they are valued at fair value as determined in good faith by or under the direction of the Board of Directors. 36 When market quotations are not readily available for any of the Fund's debt securities, such securities are valued based upon appraisals received from a pricing service using a computerized matrix system or based upon appraisals derived from information concerning the security or similar securities received from recognized dealers in those securities. Notwithstanding the above, debt securities with maturities of 60 days or less generally are valued at amortized cost if their original term to maturity was 60 days or less, or by amortizing the difference between their fair value as of the 61st day prior to maturity and their maturity value if their original term to maturity exceeded 60 days, unless in either case the Board of Directors or its delegate determines that this does not represent fair value. Securities and other instruments that are listed on U.S. and foreign stock exchanges and for which market quotations are readily available are valued at the last sale price on the exchange on which the securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales on such day, at the last bid price available. In cases where securities or other instruments are traded on more than one exchange, such securities or other instruments generally are valued on the exchange designated by Mitchell Hutchins under the direction of the Board of Directors as the primary market. Securities traded in the OTC market and listed on the Nasdaq are valued at the last available sale price on Nasdaq prior to the time of valuation; other OTC securities and instruments are valued at the last available bid price prior to the time of valuation. Other securities and assets for which reliable market quotations are not readily available (including restricted securities subject to limitations as to their sale) are valued at fair value as determined in good faith by or under the direction of the Board of Directors. All securities and other assets quoted in foreign currency and forward currency contracts are valued weekly in U.S. dollars on the basis of the foreign currency exchange rate prevailing at the time such valuation is determined by the Fund's custodian. Foreign currency exchange rates are generally determined prior to the close of the NYSE. Occasionally, events affecting the value of foreign securities and such exchange rates occur between the time at which they are determined and the close of the NYSE, which events will not be reflected in a computation of the Fund's net asset value. If events materially affecting the value of such securities or assets or currency exchange rates occurred during such time period, the securities or assets would be valued at their fair value as determined in good faith by or under the direction of the Board of Directors. The foreign currency exchange transactions of the Fund conducted on a spot basis are valued at the spot rate for purchasing or selling currency prevailing on the foreign exchange market. Under normal market conditions this rate differs from the prevailing exchange rate by an amount generally less than one-tenth of one percent due to the costs of converting from one currency to another. TAXATION GENERAL The following discussion of federal income tax consequences is for general information only. Investors should consult their tax advisors regarding the specific federal tax consequences of purchasing, holding and disposing of shares, as well as the effects thereon of state, local and foreign tax laws and any proposed tax law changes. 37 In order to continue to qualify for treatment as a regulated investment company ("RIC") under the Internal Revenue Code of 1986 ("Code"), the Fund must distribute to its stockholders for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income, net short-term capital gain and net gains from certain foreign currency transactions) ("Distribution Requirement") and must meet several additional requirements. These requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in securities or those currencies ("Income Requirement"); (2) at the close of each quarter of the Fund's taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities that are limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund's total assets and that does not represent more than 10% of the issuer's outstanding voting securities; and (3) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of its total assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer. If the Fund failed to qualify for treatment as a RIC for any taxable year, it would be taxed as an ordinary corporation on its taxable income for that year (even if that income was distributed to its Stockholders) and all distributions out of its earnings and profits would be taxable to its Stockholders as dividends (that is, ordinary income). Dividends and other distributions declared by the Fund in October, November or December of any year and payable to stockholders of record on a date in any of those months will be deemed to have been paid by the Fund and received by the stockholders on December 31st of that year if the distributions are paid by the Fund during the following January. Accordingly, those distributions will be taxed to stockholders for the year in which that December 31st falls. If the Fund retains any net capital gain (the excess of net long-term capital gain over net short-term capital loss), it may designate the retained amount as undistributed capital gains in a notice to its stockholders. If the Fund makes such a designation, it will be required to pay federal income tax at the rate of 35% on the undistributed gains ("Fund tax") and each stockholder subject to federal income tax (1) will be required to include in income, as long-term capital gains, his or her proportionate share of the undistributed gains, (2) will be allowed a credit or refund, as the case may be, for his or her proportionate share of the Fund tax and (3) will increase the tax basis of his or her Fund shares by the difference between the included income and such share of the Fund tax. A portion of the dividends from the Fund's investment company taxable income (whether paid in cash or reinvested in additional shares) may be eligible for the dividends-received deduction allowed to corporations. The eligible portion may not exceed the aggregate dividends the Fund receives from U.S. corporations. However, dividends received by a corporate stockholder and deducted by it pursuant to the dividends-received deduction are subject indirectly to the federal alternative minimum tax. It is not expected that a significant portion of the Fund's dividends will qualify for this deduction. If the Fund has both shares of common stock and preferred stock outstanding, it intends to designate distributions made to each such class in 38 any year as consisting of no more than the class's proportionate share of particular types of income based on the total distributions paid to each class for the year, including distributions out of net capital gain. Income from investments in foreign securities, and gains realized thereon, may be subject to foreign withholding or other taxes. Tax conventions between certain countries and the United States may reduce or eliminate foreign taxes, however, and many foreign countries do not impose taxes on capital gains in respect of investments by foreign investors. Stockholders will not be able to claim any foreign tax credit or deduction with respect to those foreign taxes. The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the extent it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31st of that year, plus certain other amounts. For these purposes, any such income retained by the Fund, and on which it pays federal income tax, will be treated as having been distributed. PASSIVE FOREIGN INVESTMENT COMPANIES The Fund may invest in the stock of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign corporation--other than a "controlled foreign corporation" (I.E., a foreign corporation in which, on any day during its taxable year, more than 50% of the total voting power of all voting stock therein or the total value of all stock therein is owned, directly, indirectly, or constructively, by "U.S. Stockholders," defined as U.S. persons that individually own, directly, indirectly, or constructively, at least 10% of that voting power) as to which the Fund is a U.S. shareholder--that, in general, meets either of the following tests: (1) at least 75% of its gross income is passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, the Fund will be subject to federal income tax on a portion of any "excess distribution" received on the stock of a PFIC or of any gain on disposition of that stock (collectively "PFIC income"), plus interest thereon, even if the Fund distributes the PFIC income as a taxable dividend to its Stockholders. The balance of the PFIC income will be included in the Fund's investment company taxable income and, accordingly, will not be taxable to it to the extent that income is distributed to its Stockholders. If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing fund," then, in lieu of the foregoing tax and interest obligation, the Fund will be required to include in income each year its pro rata share of the qualified electing fund's annual ordinary earnings and net capital gain--which most likely would have to be distributed by the Fund to satisfy the Distribution Requirement and avoid imposition of the Excise Tax--even if those earnings and gain are not distributed to the Fund by the qualified electing fund. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements for making the election. The Fund may elect to "mark to market" its stock in any PFIC. "Marking-to-market," in this context, means including in ordinary income each taxable year the excess, if any, of the fair market value of the PFIC's stock over the Fund's adjusted basis therein as of the end of that year. Pursuant to the election, the Fund also will be allowed to deduct (as an ordinary, not capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock included by the Fund for prior taxable years. The Fund's adjusted basis in each PFIC's stock with respect to which it makes this election will be adjusted to reflect the amounts of income included and deductions taken under the election. 39 STRATEGIES USING DERIVATIVE INSTRUMENTS Strategies using Derivative Instruments, such as selling (writing) and purchasing options and futures and entering into forward currency contracts, involve complex rules that will determine for income tax purposes the amount, character and timing of recognition of the gains and losses the Fund realizes in connection therewith. These rules also may require the Fund to "mark to market" (that is, treat as sold for their fair market value) at the end of each taxable year certain positions in its portfolio, which may cause the Fund to recognize income and/or gain without receiving cash with which to make distributions necessary to satisfy the Distribution Requirement and avoid imposition of the Excise Tax. Gains from the disposition of foreign currencies (except certain gains that may be excluded by future regulations), and gains from options, futures and forward currency contracts derived by the Fund with respect to its business of investing in securities or foreign currencies, will qualify as permissible income under the Income Requirement. If the Fund has an "appreciated financial position"--generally, an interest (including an interest through an option, futures or forward currency contract, or short sale) with respect to any stock, debt instrument (other than "straight debt") or partnership interest the fair market value of which exceeds its adjusted basis--and enters into a "constructive sale" of the same or substantially similar property, the Fund will be treated as having made an actual sale thereof, with the result that gain will be recognized at that time. A constructive sale generally consists of a short sale, an offsetting notional principal contract or futures or forward currency contract entered into by the Fund or a related person with respect to the same or substantially similar property. In addition, if the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially similar property will be deemed a constructive sale. ADDITIONAL INFORMATION STOCK REPURCHASES AND TENDERS The Fund's Board of Directors may authorize the Fund to tender for its shares to reduce or eliminate the discount to net asset value at which the Fund's shares might trade. Even if a tender offer has been made, it will be the Board's announced policy, which may be changed by the Board, not to accept tenders or effect repurchases (or, if a tender offer has not been made, not to initiate a tender offer) if (1) such transactions, if consummated, would (a) result in the delisting of the Common Stock from the NYSE (the NYSE having advised the Fund that it would consider delisting if the aggregate market value of the outstanding shares is less than $5,000,000, the number of publicly held shares falls below 600,000 or the number of round-lot holders falls below 1,200) or (b) impair the Fund's status as a RIC (which would eliminate the Fund's eligibility to deduct dividends paid to its stockholders, thus causing its income to be fully taxed at the corporate level in addition to the taxation of stockholders on distributions received from the Fund); (2) the Fund would not be able to liquidate portfolio securities in an orderly manner and consistent with the Fund's investment objective and policies in order to repurchase its shares; or (3) there is, in the Board's judgment, any (a) material legal action or 40 proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Fund, (b) suspension of trading or limitation on prices of securities generally on the NYSE or any other exchange on which portfolio securities of the Fund are traded, (c) declaration of a banking moratorium by federal or state authorities or any suspension of payment by banks in the United States, New York State or any state in which the Fund invests, (d) limitation affecting the Fund or the issuers of its portfolio securities imposed by federal or state authorities on the extension of credit by lending institutions, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States or (f) other events or conditions that would have a material adverse effect on the Fund or its stockholders if shares were repurchased. The Board of Directors may modify these conditions in light of experience. RATINGS INFORMATION DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues; Aa. Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities; A. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future; Baa. Bonds which are rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well; Ba. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class; B. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small; Caa. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest; Ca. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings; C. Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the lower end of that generic rating category. 41 DESCRIPTION OF S&P CORPORATE DEBT RATINGS AAA. An obligation rated AAA has the highest rating assigned by S&P. The obligor's capacity to meet its financial commitment on the obligation is extremely strong; AA. An obligation rated AA differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong; A. An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong; BBB. An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions; BB. An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation; B. An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation; CCC. An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation; CC. An obligation rated CC is currently highly vulnerable to nonpayment; C. A subordinated debt or preferred stock obligation rated C is currently highly vulnerable to nonpayment. The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. A C also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying. D. An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. CI. The rating CI is reserved for income bonds on which no interest is being paid. Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. R. This symbol is attached to the ratings of instruments with significant noncredit risks. It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating. Examples include: obligations linked or indexed to equities, currencies, or commodities; obligations exposed to severe prepayment risk--such as interest-only or principal-only mortgage securities; and obligations with unusually risky interest terms, such as inverse floaters. 42
- ------------------------------------------------------------------------------------------------------------------------------------ PRO FORMA PORTFOLIO OF INVESTMENTS JANUARY 31, 2000 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ MANAGED HIGH MANAGED HIGH Principal YIELD PLUS FUND YIELD FUND COMBINED Amount (combined) Maturity Interest (000) Dates Rates Value Value Value - -------------- ---------------- ----------- ---------------------------------------- Corporate Bonds - 126.80% Automotive - 2.14% $5,250 HDA Parts Systems Incorporated 08/01/05 12.000 % $4,072,500 $678,750 $4,751,250 4,750 JL French Automotive Castings** 06/01/09 11.500 4,040,000 757,500 4,797,500 -------------------------------------------- 8,112,500 1,436,250 9,548,750 -------------------------------------------- Cable - 15.73% 13,000 21st Century Telecom Group Incorporated 02/15/08 12.250 + 8,190,000 682,500 8,872,500 7,000 Charter Communications Holdings 04/01/09 10.000 6,930,000 0 6,930,000 15,250 Knology Holdings Incorporated 10/15/07 11.875 + 8,844,375 1,335,000 10,179,375 6,000 NTL Incorporated 10/01/08 11.500 5,300,000 1,060,000 6,360,000 13,575 Park 'N View Incorporated 05/15/08 13.000 8,381,250 1,800,000 10,181,250 11,250 RCN Corporation 10/15/07 11.125 + 6,900,000 862,500 7,762,500 5,000 UIH Australia/Pacific Incorporated 05/15/06 14.000 + 2,580,000 1,720,000 4,300,000 9,250 United Pan Europe** 08/01/09 10.875 4,714,250 327,000 5,041,250 19,250 United Pan Europe** 08/01/09 - 11/01/09 12.500 to 13.375+ 10,137,000 354,250 10,491,250 -------------------------------------------- 61,976,875 8,141,250 70,118,125 -------------------------------------------- Chemicals - 2.69% 7,500 Lyondell Chemical Company 05/01/07 9.875 6,698,000 689,500 7,387,500 4,500 ZSC Specialty** 07/01/09 11.000 4,080,000 510,000 4,590,000 -------------------------------------------- 10,778,000 1,199,500 11,977,500 -------------------------------------------- Communications - Fixed - 28.80% 9,687 Alestra S.A.** 05/15/06 12.125 8,752,153 1,007,500 9,759,653 5,000 Allegiance Telecom Incorporated 05/15/08 12.875 5,650,000 0 5,650,000 9,250 Barak ITC 11/15/07 12.500 + 4,340,000 840,000 5,180,000 2,500 Carrier1 International S.A.# 02/15/09 13.250 2,520,000 280,000 2,800,000 4,543 Esprit Telecom Group PLC 06/15/08 10.875 3,882,200 388,220 4,270,420 5,250 Flag Limited 01/30/08 8.250 4,550,000 227,500 4,777,500 2,000 Focal Communication Corporation 01/15/00 11.875 2,040,000 0 2,040,000 5,000 Global Crossing Holdings Limited** 11/15/09 9.500 4,825,000 0 4,825,000 6,500 GlobeNet Communications Group** 07/15/07 13.000 5,880,000 490,000 6,370,000 7,000 GST Equipment Funding Incorporated 05/01/07 13.250 6,000,000 1,000,000 7,000,000 7,750 GT Group Telecom Incorporated 02/01/10 1.000 4,126,875 0 4,126,875 9,150 Hyperion Telecommunications Incorporated 11/01/07 12.000 8,040,625 1,475,000 9,515,625 3,000 ICG Services Incorporated 02/15/08 10.000 1,120,000 565,000 1,685,000 4,025 Intelcom Group USA Incorporated 09/15/05 1.000 3,662,750 0 3,662,750 5,640 KMC Telecom Holdings Incorporated 05/15/09 13.500 5,140,000 500,000 5,640,000 5,750 Metromedia Fiber Network Incorporated 11/15/08 10.000 5,012,500 751,875 5,764,375 5,550 NEXTLINK Communications Incorporated 06/01/09 10.750 5,163,437 428,188 5,591,625 8,500 NorthEast Optic Network Incorporated 08/15/08 12.750 8,882,500 0 8,882,500 8,475 Pathnet Incorporated 04/15/08 12.250 4,933,500 660,000 5,593,500 5,000 Tele1 Europe BV** 05/15/09 13.000 4,916,250 258,750 5,175,000 11,000 Viatel Incorporated 04/15/08 12.500 + 5,800,000 580,000 6,380,000 9,750 Williams Communications Group 10/01/09 10.875 8,497,500 1,545,000 10,042,500 4,000 World Access Incorporated 01/15/08 13.250 3,180,625 454,375 3,635,000 -------------------------------------------- 116,915,915 11,451,408 128,367,323 -------------------------------------------- Communications - Mobile - 7.75% 1,000 Crown Castle International Corporation 08/01/11 9.500 0 605,000 605,000 7,000 ICO Global Communications Limited#(b) 08/01/05 15.000 3,185,000 245,000 3,430,000 7,500 Nextel Communications Incorporated 02/15/08 9.950 + 3,462,500 1,731,250 5,193,750 14,000 Nextel International Incorporated 04/15/08 12.125 + 7,812,500 937,500 8,750,000 7,875 PTC International Finance** 12/01/09 11.250 7,462,500 373,125 7,835,625 10,625 Spectrasite Holdings Incorporated 04/15/09 11.250 + 6,162,500 0 6,162,500 2,500 Voicestream Wire** 11/15/09 10.375 2,562,500 0 2,562,500 -------------------------------------------- 30,647,500 3,891,875 34,539,375 -------------------------------------------- 43 - ------------------------------------------------------------------------------------------------------------------------------------ PRO FORMA PORTFOLIO OF INVESTMENTS JANUARY 31, 2000 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ MANAGED HIGH MANAGED HIGH Principal YIELD PLUS FUND YIELD FUND COMBINED Amount (combined) Maturity Interest (000) Dates Rates Value Value Value - -------------------------------------------------------------------------- ----------- ---------------------------------------- Corporate Bonds -(continued) Consumer Manufacturing - 3.30% $5,250 Commemorative Brands Incorporated 01/15/07 11.000 % $2,200,000 $687,500 $2,887,500 5,500 Decora Industries Incorporated 05/01/05 11.000 3,870,000 860,000 4,730,000 4,000 Desa International Incorporated 12/15/07 9.875 3,040,000 0 3,040,000 4,250 Jafra Cosmetics International Incorporated 05/01/08 11.750 4,037,500 0 4,037,500 -------------------------------------------- 13,147,500 1,547,500 14,695,000 -------------------------------------------- Energy - 7.86% 1,650 GulfMark Offshore Incorporated 06/01/08 8.750 1,518,000 0 1,518,000 4,500 Key Energy Services Incorporated 01/15/09 14.000 4,360,000 545,000 4,905,000 5,000 Northern Offshore ASA 05/15/05 10.000 2,360,000 590,000 2,950,000 8,791 Orion Refining Corporation** 12/01/03 15.000 7,396,966 514,603 7,911,569 3,000 Pride International Incorporated 06/01/09 10.000 2,700,000 300,000 3,000,000 7,250 R & B Falcon Corporation 12/15/08 9.500 5,606,250 1,462,500 7,068,750 8,250 Tesoro Petroleum Corporation 07/01/08 9.000 6,975,000 697,500 7,672,500 -------------------------------------------- 30,916,216 4,109,603 35,025,819 -------------------------------------------- Finance - 5.43% 6,488 Airplanes Pass-Through Trust 03/15/19 10.875 4,466,937 1,340,081 5,807,018 5,000 Morgan Stanley Aircraft Finance 03/15/23 8.700 4,275,000 0 4,275,000 6,250 Olympic Financial Limited 03/15/07 11.500 5,733,750 781,875 6,515,625 13,000 Signet Capital Trust I 08/15/27 9.500 4,290,000 0 4,290,000 5,550 Superior National Insurance Group 12/01/17 10.750 3,030,000 300,000 3,330,000 -------------------------------------------- 21,795,687 2,421,956 24,217,643 -------------------------------------------- Food & Beverage - 4.94% 8,125 Iowa Select Farms L.P.** 12/01/05 10.750 3,250,000 812,500 4,062,500 16,625 Mrs Field's Holdings Company Incorporated**# 12/01/05 14.000 + 8,890,000 420,000 9,310,000 1,000 Mrs Field's Original Cookies Incorporated** 12/01/04 10.125 0 800,000 800,000 8,808 Packaged Ice Incorporated 02/01/05 9.750 6,504,120 1,335,000 7,839,120 -------------------------------------------- 18,644,120 3,367,500 22,011,620 -------------------------------------------- Gaming - 2.06% 4,250 Hollywood Casino Corporation 05/01/07 11.250 4,100,000 256,250 4,356,250 5,125 Park Place Entertainment Corporation 12/15/05 7.875 4,359,063 471,250 4,830,313 -------------------------------------------- 8,459,063 727,500 9,186,563 -------------------------------------------- General Industrial - 5.04% 7,000 Aqua Chemical Incorporated 07/01/08 11.250 3,710,000 0 3,710,000 8,250 Blount Incorporated** 08/01/09 13.000 7,931,250 793,125 8,724,375 3,750 J.B. Poindexter & Company Incorporated 05/15/04 12.500 2,835,000 708,750 3,543,750 8,000 Sabreliner Corporation** 06/15/08 11.000 5,670,000 810,000 6,480,000 -------------------------------------------- 20,146,250 2,311,875 22,458,125 -------------------------------------------- Healthcare - 2.33% 4,000 Fresenius Medical Care Capital Trust 02/01/08 7.875 2,685,000 895,000 3,580,000 4,000 Tenet Healthcare Corporation 12/01/08 8.125 3,228,750 461,250 3,690,000 3,000 Triad Hospitals Holdings Incorporated** 05/15/09 11.000 2,794,500 310,500 3,105,000 -------------------------------------------- 8,708,250 1,666,750 10,375,000 -------------------------------------------- Hotels & Lodging - 2.35% 4,650 Host Marriott L.P. 02/15/06 8.375 4,301,250 0 4,301,250 2,875 Signature Resorts Incorporated 05/15/06 9.250 1,926,250 0 1,926,250 6,322 Silverleaf Resorts Incorporated 04/01/08 10.500 3,398,240 837,500 4,235,740 -------------------------------------------- 9,625,740 837,500 10,463,240 -------------------------------------------- Media- 0.40% 3,250 Inter Act Systems Incorporated(b) 08/01/03 14.000 1,375,000 412,500 1,787,500 -------------------------------------------- Metals - 1.24% 7,250 Metal Management Incorporated 05/15/08 10.000 4,560,000 950,000 5,510,000 -------------------------------------------- Real Estate - 1.67% 9,400 American Architectural Products Corporation 12/01/07 11.750 3,360,000 400,000 3,760,000 4,075 D.R. Horton Incorporated 02/01/09 8.000 3,235,375 452,500 3,687,875 -------------------------------------------- 6,595,375 852,500 7,447,875 -------------------------------------------- 44 - ------------------------------------------------------------------------------------------------------------------------------------ PRO FORMA PORTFOLIO OF INVESTMENTS JANUARY 31, 2000 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ MANAGED HIGH MANAGED HIGH Principal YIELD PLUS FUND YIELD FUND COMBINED Amount (combined) Maturity Interest (000) Dates Rates Value Value Value - -------------- ---------------- ----------- ---------------------------------------- Corporate Bonds - (concluded) Restaurants - 1.11% $6,230 American Restaurant Group Incorporated 02/15/03 11.500 % $4,370,300 $598,125 $4,968,425 -------------------------------------------- Retail - 3.18% 7,210 Advance Holding Corporation 04/15/09 12.875 + 2,999,800 821,500 3,821,300 5,350 Advance Stores Company Incorporated 04/15/08 10.250 3,956,000 645,000 4,601,000 6,000 Ames Department Stores Incorporated 04/15/06 10.000 5,252,500 477,500 5,730,000 -------------------------------------------- 12,208,300 1,944,000 14,152,300 -------------------------------------------- Service - 8.83% 8,500 Allied Waste North America Incorporated** 08/01/09 10.000 6,525,000 870,000 7,395,000 6,995 American Eco Corporation 05/15/08 9.625 2,937,550 490,000 3,427,550 6,750 Ameriserve Food Distribution Incorporated 07/15/07 10.125 2,328,750 0 2,328,750 7,135 Atlantic Express Transportation Corporation 02/01/04 10.750 6,193,450 727,500 6,920,950 8,750 Budget Group Incorporated 04/01/06 9.125 7,110,625 917,500 8,028,125 4,000 Nationwide Credit Incorporated 01/15/08 10.250 2,520,000 0 2,520,000 5,750 Premier Graphics Incorporated 12/01/05 11.500 2,137,500 450,000 2,587,500 6,500 Waste Systems International Incorporated# 01/15/06 11.500 5,197,500 945,000 6,142,500 -------------------------------------------- 34,950,375 4,400,000 39,350,375 -------------------------------------------- Supermarkets & Drugstores - 1.29% 6,000 The Pantry Incorporated 10/15/07 10.250 5,760,000 0 5,760,000 -------------------------------------------- Technology - 12.21% 7,000 Ampex Corporation* 03/15/03 12.000 6,532,500 502,500 7,035,000 4,000 Chippac International Limited** 08/01/09 12.750 3,622,500 517,500 4,140,000 8,000 Earthwatch Incorporated**# 07/15/07 13.000 + 5,600,000 0 5,600,000 6,690 Fairchild Semiconductor Corporation 03/15/07 10.125 6,015,000 691,725 6,706,725 3,000 Globix Corporation 02/01/10 12.500 3,030,000 0 3,030,000 8,500 Intersil Corporation**# 08/15/09 13.250 8,400,000 1,120,000 9,520,000 4,750 SCG Holdings Corporation** 08/01/09 12.000 4,515,625 531,250 5,046,875 5,775 Verio Incorporated 12/01/08 11.250 5,525,563 523,750 6,049,313 13,000 Wam! Net Incorporated 03/01/05 13.250 + 6,160,000 1,120,000 7,280,000 -------------------------------------------- 49,401,188 5,006,725 54,407,913 -------------------------------------------- Transportation - 4.85% 1,465 Eletson Holdings Incorporated 11/15/03 9.250 1,274,550 0 1,274,550 8,000 Equimar Shipholdings Limited 07/01/07 9.875 4,290,000 990,000 5,280,000 1,250 Navigator Gas Transport PLC**# 06/30/07 12.000 0 37,500 37,500 6,000 Millenium Seacarriers Incorporated 07/15/05 12.000 3,420,000 0 3,420,000 6,750 Stena AB 06/15/07 8.750 5,125,000 410,000 5,535,000 10,000 TFM S.A. de C.V. 06/15/09 11.750 + 5,747,500 302,500 6,050,000 -------------------------------------------- 19,857,050 1,740,000 21,597,050 -------------------------------------------- Utilities - 1.62% 5,500 AES Corporation 06/01/09 9.500 4,975,000 497,500 5,472,500 1,750 Panda Funding Corporation 08/20/12 11.625 1,314,423 436,490 1,750,913 -------------------------------------------- 6,289,423 933,990 7,223,413 -------------------------------------------- Total Corporate Bonds (cost - $560,029,486, $69,008,986, $629,038,472) 505,240,626 59,948,306 565,188,932 -------------------------------------------- Convertible Bonds - 0.50% Communications - Fixed- 0.05% 215 GST Telecommunications Incorporated 12/15/05 13.875 0 204,250 204,250 -------------------------------------------- Service - 0.45% 2,496 Waste Systems International Incorporated** 05/13/05 7.000 1,215,000 807,079 2,022,079 -------------------------------------------- Total Convertible Bonds (cost - $1,194,375, $1,183,711, $2,378,086) 1,215,000 1,011,329 2,226,329 -------------------------------------------- 45 - ------------------------------------------------------------------------------------------------------------------------------------ PRO FORMA PORTFOLIO OF INVESTMENTS JANUARY 31, 2000 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ MANAGED HIGH MANAGED HIGH Number YIELD PLUS FUND YIELD FUND COMBINED of Shares (combined) - -------------- Value Value Value -------------------------------------------- Common Stock(a) - 1.66% Cable- 0.00% 2,000 Knology Holdings Incorporated 0 $10,500 $10,500 -------------------------------------------- Communications - Fixed - 0.96% 110,549 Viatel Incorporated $4,083,404 0 4,083,404 12,568 World Access Incorporated 189,698 27,100 216,798 -------------------------------------------- 4,273,102 27,100 4,300,202 -------------------------------------------- Food & Beverage - 0.04% 40,949 Packaged Ice Incorporated 130,208 59,182 189,390 -------------------------------------------- Gaming- 0.01% 10,000 Hollywood Casino Corporation 0 42,500 42,500 -------------------------------------------- Media- 0.11% 2,000 MediaNews Group Incorporated 0 500,000 500,000 -------------------------------------------- Retail- 0.08% 47,500 Samuel Jewelers Incorporated* 0 368,125 368,125 -------------------------------------------- Service - 0.27% 289,744 Waste Systems International Incorporated 970,509 224,685 1,195,194 -------------------------------------------- Technology - 0.17% 239,676 Ampex Corporation* 325,000 453,947 778,947 -------------------------------------------- Total Common Stock (cost - $4,865,535, $1,211,625, $6,077,160) 5,698,819 1,686,038 7,384,857 -------------------------------------------- Preferred Stock(a) - 3.18% Cable - 0.98% 4,714 21st Century Telecommunications Group Incorporated** 4,384,020 0 4,384,020 -------------------------------------------- Communications - Fixed 0.56% 2750 ICG Holdings Corporation 2,502,500 0 2,502,500 -------------------------------------------- Communications - Mobile - 0.95% 4,192 Crown Castle International Corporation 4,254,880 0 4,254,880 -------------------------------------------- Energy - 0.02% 104,029 Orion Refining Corporation 56,869 14,183 71,052 -------------------------------------------- Media - 0.36% 6,500 InterAct systems Incorporated** 1,250,000 375,000 1,625,000 -------------------------------------------- Paper & Packaging - 0.20% 7,935 Packaging Corporation of America 872,850 0 872,850 -------------------------------------------- Restaurants- 0.11% 592 American Restaurant Group Incorporated 0 473,600 473,600 -------------------------------------------- Total Preferred Stock (cost - $10,212,394, $1,177,870, $11,390,264) 13,321,119 862,783 14,183,902 -------------------------------------------- 46 - ------------------------------------------------------------------------------------------------------------------------------------ PRO FORMA PORTFOLIO OF INVESTMENTS JANUARY 31, 2000 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ MANAGED HIGH MANAGED HIGH YIELD PLUS FUND YIELD FUND COMBINED Number of Warrants Maturity Interest (combined) Dates Rates Value Value Value - -------------- ---------------- ----------- ---------------------------------------- Warrants(a) - 1.33% Cable - 0.44% 3,500 21st Century Telecommunications Group Incorporated $962,500 0 $962,500 14,575 Park 'N View Incorporated 791,375 $156,000 947,375 2,000 UIH Australia Pacific Incorporated 0 60,000 60,000 -------------------------------------------- 1,753,875 216,000 1,969,875 -------------------------------------------- Communications - Fixed - 0.23% 8,475 Pathnet Incorporated 74,750 10,000 84,750 5,000 Tele1 Europe BV** 902,500 47,500 950,000 -------------------------------------------- 977,250 57,500 1,034,750 -------------------------------------------- Communications - Mobile 0.00% 1,750 McCaw International Limited 0 5,250 5,250 -------------------------------------------- Energy - 0.05% 4,500 Key Energy Services Incorporated 200,000 25,000 225,000 -------------------------------------------- Financial Services 0.00% 750 Olympic Financial Limited 0 750 750 -------------------------------------------- Media- 0.04% 6,500 InterAct Electronic Marketing Incorporated 50 15 65 6,500 InterAct Systems Incorporated 125,000 37,500 162,500 -------------------------------------------- 125,050 37,515 162,565 -------------------------------------------- Restaurants- 0.00% 500 American Restaurants Group Incorporated 0 5 5 -------------------------------------------- Service - 0.02% 97,500 Waste Systems International Incorporated** 61,875 11,250 73,125 -------------------------------------------- Technology - 0.55% 800 Electronic Retailing Systems International Incorporated 0 800 800 8,500 Intersil Corporation 1,875,000 250,000 2,125,000 30,000 Wam! Net Incorporated 264,000 66,000 330,000 -------------------------------------------- 2,139,000 316,800 2,455,800 -------------------------------------------- Transportation - 0.00% 6,000 Millenium Seacarriers Incorporated 750 0 750 -------------------------------------------- Total Warrants (cost - $188, $85,134, $85,322) 5,257,800 670,070 5,927,870 -------------------------------------------- 47 Principal Amount (combined) (000) Repurchase Agreements - 2.18% - -------------- $7,595 Repurchase Agreement dated 01/31/2000 with Zions Bank, collateralized by $7,865,000 U.S. Treasury Notes, 5.500% due 07/31/2001 (value-$7,747,025); proceeds; $7,596,198 02/01/00 5.680 % 7,595,000 0 7,595,000 -------------------------------------------- 2,128 Repurchase Agreement dated 01/31/2000 with Zions Bank, collateralized by $2,160,000 U.S. Treasury Notes, 5.500% due 08/31/2001 (value-$2,175,012); proceeds; $2,128,336 02/01/00 5.680 0 2,128,000 2,128,000 -------------------------------------------- Total Repurchase Agreements (Cost - $7,595,000, $2,128,000, $9,723,000) -- 7,595,000 2,128,000 9,723,000 -------------------------------------------- Total Investments (Cost - $583,896,978, 135.65% 538,328,364 66,306,526 604,634,890 $74,795,326, $658,692,304) Liabilities in excess of other assets -35.65% (160,822,811) 1,920,609 (158,902,202) -------------------------------------------- Net Assets 100.00% $377,505,553 $68,227,135 $445,732,688 ============================================
- -------------------------------------------- # Security represents a unit which is composed of the stated bond with attached warrants or common stock. + Denotes a step-up bond or zero coupon bond that converts to the noted fixed rate at a designated future date. * Illiquid securities representing 1.84% of combined net assets. These securities are valued at fair value as determined in good faith by a valuation committee under the direction of the Funds' board of directors. ** Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. (a) Non-income producing securities. (b) Bond interest in default See accompanying notes to pro forma financial statements 48
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES JANUARY 31, 2000 (UNAUDITED) Managed High Managed High Combined Yield Plus Fund Yield Fund ASSETS Investments in securities, at value (cost - $583,896,978, $74,795,326, and $658,692,304, respectively) .......... $538,328,364 $ 66,306,526 $604,634,890 Cash .................................................... 0 14,113 14,113 Receivables for investments sold......................... 5,593,260 646,250 6,239,510 Interest receivable...................................... 12,153,394 1,429,610 13,583,004 Interest receivable on swap contract..................... 459,607 0 459,607 Unrealized appreciation on interest rate swap............ 20,325 0 20,325 --------------- --------------- ------------ Total assets ............................................ 556,554,950 68,396,499 624,951,449 --------------- --------------- ------------ LIABILITIES Bank loan payable ....................................... 167,000,000 0 167,000,000 Payable for investments purchased........................ 9,552,222 13,154 9,565,376 Payable for interest on bank loan........................ 945,434 0 945,434 Payable to investment adviser and administrator......... 325,503 52,568 378,071 Accrued expenses and other liabilities................... 1,226,238 103,642 1,329,880 --------------- --------------- ------------ Total liabilities........................................ 179,049,397 169,364 179,218,761 --------------- --------------- ------------ NET ASSETS Capital Stock-$0.001 par value; 200,000,000 shares authorized (31,858,651, 6,031,667, and 37,616,221 shares outstanding, respectively)....... 474,998,612 90,447,851 565,446,463 Undistributed net investment income...................... 5,727,200 131,923 5,859,123 Accumulated net realized loss from investment transactions.......................................... (57,671,970) (13,863,839) (71,535,809) Net unrealized depreciation of investments and interest rate swap..................................... (45,548,289) (8,488,800) (54,037,089) --------------- --------------- ------------ Net assets applicable to shares outstanding.............. $377,505,553 $ 68,227,135 $445,732,688 =============== =============== ============ Net asset value per share................................ $11.85 $11.31 $11.85 ====== ====== ======
See accompanying notes to pro forma financial statements 49
PRO FORMA STATEMENT OF OPERATIONS For the Twelve Months Ended January 31, 2000 (unaudited) - ---------------------------------------------------------------------------------------------------------------------------------- Managed High Managed High Yield Plus Fund Yield Fund Adjustments Combined INVESTMENT INCOME: Interest $61,710,622 $ 8,243,842 $ 3,246,492 (a) $ 73,200,956 ------------------ ----------------- -------------- -------------- EXPENSES: Bank loan interest expense...................... 8,591,719 0 1,650,000 (a) 10,241,719 Investment advisory and administration fees..... 3,703,061 634,026 61,331 (b) 4,398,418 Transfer agency fees and expenses............... 16,934 11,622 0 28,556 Custody and accounting.......................... 326,484 42,430 15,000 (c) 383,914 Reports and notices to shareholders............. 72,543 45,716 (30,000)(d) 88,259 Legal and audit................................. 392,975 58,954 (58,954)(d) 392,975 Amortization of organizational expenses......... 45,053 0 0 45,053 Trustees' fees and expenses..................... 11,040 10,303 (10,303)(d) 11,040 Other expenses.................................. 107,760 63,129 (20,000)(d) 150,889 ------------------ ----------------- -------------- -------------- 13,267,569 866,180 1,607,074 15,740,823 ------------------ ----------------- -------------- -------------- Net investment income........................... 48,443,053 7,377,662 1,639,418 57,460,133 ------------------ ----------------- -------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT TRANSACTIONS: Net realized losses from: Investment transactions..................... (42,248,727) (5,032,949) (47,281,676) Net change in unrealized appreciation/depreciation of: Investments..................................... 13,889,843 (408,158) 13,481,685 ------------------ ----------------- -------------- Net realized and unrealized losses from investment transactions ......................... (28,358,884) (5,441,107) (33,799,991) ------------------ ----------------- -------------- -------------- Net increase in net assets resulting from operations.................................. $20,084,169 $1,936,555 $ 1,639,418 $23,660,142 ================== ================= ============== ==============
------------ (a) Reflects the anticipated additional income generated and interest expense incurred after the merger, through leverage of Managed High Yield's assets. (b) Reflects increase in fees charged on the leveraged assets of the Managed High Yield Plus Fund. (c) Reflects the anticipated additional custody charges after the merger, as a result of additional leverage. (d) Reflects the anticipated savings of the merger. See accompanying notes to pro forma financial statements 50 Notes To Pro Forma Combined Financial Statements (Unaudited) Basis of Presentation: Subject to the approval of the Plan of Reorganization by the stockholders of Managed High Yield Fund Inc. ("High Yield Fund"), Managed High Yield Plus Fund Inc. ("Plus Fund") would acquire the assets of High Yield Fund in exchange solely for the assumption by Plus Fund of High Yield Fund's liabilities and shares of Plus Fund that correspond to the outstanding shares of High Yield Fund. The number of shares to be received would be based on the relative net asset value of High Yield Fund shares and Plus Fund shares on the effective date of the Plan of Reorganization and High Yield Fund will be terminated as soon as practicable thereafter. The pro forma combined financial statements reflect the financial position of High Yield Fund and Plus Fund at January 31, 2000 and the combined results of operations of High Yield Fund and Plus Fund for the year ended January 31, 2000. As a result of the plan of reorganization, the investment advisory and administration fee may increase due to the fee schedule of Plus Fund being based on total assets minus liabilities other than the aggregate indebtedness constituting leverage. As closed-end funds, High Yield Fund and Plus Fund currently pay no Rule 12b-1 distribution or service fees. Other fixed expenses will be reduced due to the elimination of duplicate expenses. In addition, the pro forma combined statement of assets and liabilities has not been adjusted as a result of the proposed transaction because such adjustment would not be material. IT IS ESTIMATED THAT THE COST OF APPROXIMATELY $245,000 ASSOCIATED WITH THE MERGER WILL BE CHARGED TO EACH FUND SO THAT EACH FUND BEARS ITS OWN EXPENSES OF THE REORGANIZATION. These costs are not included in the pro forma statement of operations since they are not recurring. The pro forma combined financial statements are presented for the information of the reader and may not necessarily be representative of what the actual combined financial statements would have been had the Plan of Reorganization occurred on January 31, 2000. The pro forma combined financial statements should be read in conjunction with the historical financial statements of the constituent Funds included in or incorporated by reference in the statement of additional information. Significant Accounting Policies: The Fund's financial statements are prepared in accordance with generally accepted accounting principles which may require the use of management accruals and estimates. These unaudited financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol HYF. The following is a summary of significant accounting policies followed by the Fund. VALUATION OF INVESTMENTS-The Fund calculates its net asset value based on the current market value for its portfolio securities. The Fund normally obtains market values for its securities from independent pricing sources and broker-dealers. Independent pricing sources use last reported sale prices, current market quotations or valuations from computerized "matrix" systems that derive values based on comparable securities. Securities traded in the over-the-counter ("OTC") market and listed on The Nasdaq Stock Market, Inc.("Nasdaq") normally are valued at the last sale price on the Nasdaq prior to valuation. Other OTC securities are valued at the last bid price available prior to valuation. Securities which are listed on U.S. and foreign stock exchanges normally are valued at the last sale price on the day the securities are valued or, lacking any sales on such day, at the last available bid price. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market by Mitchell Hutchins Asset Management Incorporated ("Mitchell Hutchins"), a wholly owned asset management subsidiary of PaineWebber Incorporated ("PaineWebber") and investment adviser and administrator of the Fund. If a market value is not available from an independent pricing source for a particular security, that security is valued at fair value as determined in good faith by or under the direction of the Fund's board of directors (the "board"). The amortized cost method of valuation, which approximates market value, generally is used to value short-term debt instruments with sixty days or less remaining to maturity, unless the board determines that this does not represent fair value. All investments quoted in foreign currencies will be valued daily in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the time such valuation is determined by the Fund's custodian. REPURCHASE AGREEMENTS-The Fund's custodian takes possession of the collateral pledged for investments in repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to ensure that the value, including accrued interest, is at least equal to the repurchase price. In the event of default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. The Fund occasionally participates in joint repurchase agreement transactions with other funds managed by Mitchell Hutchins. 51 INVESTMENT TRANSACTIONS AND INVESTMENT INCOME-Investment transactions are recorded on the trade date. Realized gains and losses from investment transactions are calculated using the identified cost method. Interest income is recorded on an accrual basis. Discounts are accreted and premiums are amortized as adjustments to interest income and the identified cost of investments. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to stockholders are recorded on the ex-dividend date. Dividends from net investment income and distributions from net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on the federal tax basis treatment; temporary differences do not require reclassification. BORROWINGS-The Fund has a $200 million dollar committed credit facility ("facility"). Under the terms of the facility, the Fund borrows at the London Interbank Overnight Rate ("LIBOR") plus facility and administrative fees. In addition, the Fund pays a liquidity fee on the unused portion of the facility. The Fund may borrow up to 33 1/3% of its total assets up to the committed amount. In accordance with the terms of the debt agreement, the Fund pledges assets as collateral for the bank loan. 52 PART C. OTHER INFORMATION ITEM 15. INDEMNIFICATION. Article Twelfth of the Managed High Yield Plus Fund Inc.'s ("Plus Fund" or "Fund") Articles of Incorporation, incorporated by reference as exhibit 1 to this Registration Statement, and Article IX of the Fund's Amended and Restated Bylaws, incorporated by reference as exhibit 2 to this Registration Statement, provide that the Fund shall indemnify its present and past directors, officers, employees and agents, and persons who are serving or have served at the Fund's request in similar capacities for other entities to the maximum extent permitted by applicable law (including Maryland law and the 1940 Act). Section 2-418(b) of the Maryland General Corporation Law ("Maryland Code") permits the Fund to indemnify its directors unless it is proved that the act or omission of the director was material to the cause of action adjudicated in the proceeding, and (a) the act or omission was committed in bad faith or was the result of active or deliberate dishonesty or (b) the director actually received an improper personal benefit in money, property or services or (c) in the case of a criminal proceeding, the director had reasonable cause to believe the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses incurred in connection with a proceeding, in accordance with the Maryland Code. Pursuant to Section 2-418(j)(1) and Section 4-418(j)(2) of the Maryland Code, the Fund is permitted to indemnify its officers, employees and agents to the same extent. The provisions set forth above apply insofar as consistent with Section 17(h) of the 1940 Act, which prohibits indemnification of any director or officer of the Fund against any liability to the Fund or its Stockholders to which such director or officer otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Section 9 of the Advisory Contract with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") filed as exhibit 6 to this Registration Statement provides that Mitchell Hutchins shall not be liable for any error of judgment or mistake of law or for loss suffered by the Fund in connection with the matters to which the Advisory Contract relates, except a loss resulting from the willful misfeasance, bad faith or gross neglect of Mitchell Hutchins in the performance of its duties or from reckless disregard of its obligations and duties under the Advisory Contract. Section 7 of the Underwriting Agreement filed as exhibit 7 to this Registration Statement provides that the Fund and Mitchell Hutchins, jointly and severally, will indemnify each Underwriter and its directors, officers, employees and agents, and each person, if any, who controls such underwriter within the meaning of Section 15 of the Securities Act of 1933 ("1933 Act") and section 20 of the Securities and Exchange Act of 1934 from and against all losses, claims, liabilities, expenses and damages to which any of them may become subject arising out of any alleged untrue statement of material fact in any preliminary prospectus, the Registration Statement filed on N-2 or the prospectus or any amendment or supplement thereto or in any sales materials or any application or other document executed by or on behalf of the Fund filed in any jurisdiction in order to qualify the shares of Managed High Yield Plus Fund Inc. under the securities laws thereof or filed with the SEC, or the alleged omission to state in any such document a material fact required to be stated in it or necessary to make the statements therein not misleading. The Underwriting Agreement further provides that Mitchell Hutchins and each officer or director of the Fund who signs a Registration Statement shall be indemnified by the Underwriter to the same extent as set out above, but only insofar as any liability arises out of any untrue statement or omission made in reliance on and in conformity with information furnished to the Fund by the Underwriter expressly for use in the preparation of the documents in which the statement or omission is made or alleged to be made. Insofar as indemnification for liabilities arising under the 1933 Act may be provided to directors, officers and controlling persons of the Fund, pursuant to the foregoing provisions or otherwise, the Fund has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other that the payment by the Fund of expenses incurred or paid by a director, officer or controlling person of the Fund in connection with the successful defense of any action, suit or proceeding or payment pursuant to any insurance policy) is asserted against the Fund by such director, officer or controlling person in connection with the securities being registered, the Fund will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. ITEM 16. EXHIBITS. (1) Articles of Incorporation 1/ (2) (a) Amended and Restated Bylaws 2/ (b) Amendment to Amended and Restated Bylaws dated January 18, 2000 (filed herewith) (3) Voting Trust Agreements - None (4) A copy of the form of Agreement and Plan of Reorganization and Termination is attached as Appendix A to the Prospectus contained in the Registration Statement. (5) (a) Specimen of Share Certificate 2/ (b) Dividend Reinvestment Plan 2/ (c) Portions of the Articles of Incorporation and the By-laws of the Registrant defining the rights of holders of common stock of the Registrant 3/ (6) Investment Advisory and Administration Contract (filed herewith) (7) (a) Underwriting Agreement (filed herewith) (b) Amended and Restated Master Agreement among Underwriters (filed herewith) (c) Amended and Restated Master Selected Dealer Agreement (filed herewith) (8) Bonus, profit sharing or pension plans - None (9) Custodian Agreement (filed herewith) (10) Not Applicable (11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the legality of securities being registered (filed herewith) (12) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters in connection with Managed High Yield Plus Fund Inc., and Managed High Yield Fund Inc. (to be filed) (13) (a) Transfer Agency Agreement (filed herewith) (b) Revolving Credit and Security Agreement (filed herewith) (c) Amendment to Revolving Credit and Security Agreement (filed herewith) (14) Consent of Independent Auditors (filed herewith) (15) Financial statements omitted from part B - None (16) Powers of Attorney 4/ - ----------------------------- 1/ Incorporated by reference from the Registration Statement on Form N-2 as filed May 24, 1998. 2/ Incorporated by reference to the Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2, filed June 24, 1998. 3/ Incorporated by reference from Article VI of Registrant's Articles of Incorporation and from Articles II and VI of the Amended and Restated By-laws. 4/ Incorporated by reference from Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 as filed May 26, 1998. ITEM 17. UNDERTAKINGS. (1) The undersigned Registrant agrees that prior to any public re-offering of the securities registered through the use of the prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, the re-offering prospectus will contain the information called for by the applicable registration form for re-offering by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new Registration Statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form N-14 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York, on the 17th day of February, 2000. MANAGED HIGH YIELD PLUS FUND INC. By: /s/ Dianne E. O'Donnell --------------------------------------- Dianne E. O'Donnell Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form N-14 has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date - --------- ----- ---- /s/ Margo N. Alexander - ------------------------------------ President and Director February 17, 2000 Margo N. Alexander * (Chief Executive Officer) /s/ E. Garrett Bewkes, Jr. - ------------------------------------ Director and Chairman February 17, 2000 E. Garrett Bewkes, Jr. * of the Board of Directors /s/ Richard Q. Armstrong - ------------------------------------ Director February 17, 2000 Richard Q. Armstrong * /s/ Richard R. Burt - ------------------------------------ Director February 17, 2000 Richard R. Burt * /s/ Mary C. Farrell - ------------------------------------ Director February 17, 2000 Mary C. Farrell * /s/ Meyer Feldberg - ------------------------------------ Director February 17, 2000 Meyer Feldberg * /s/ George W. Gowen - ------------------------------------ Director February 17, 2000 George W. Gowen * /s/ Frederic V. Malek - ------------------------------------ Director February 17, 2000 Frederic V. Malek * /s/ Carl W. Schafer - ------------------------------------ Director February 17, 2000 Carl W. Schafer * /s/ Brian M. Storms - ------------------------------------ Director February 17, 2000 Brian M. Storms ** /s/ Paul H. Schubert - ------------------------------------ Vice President and Treasurer February 17, 2000 Paul H. Schubert (Chief Financial and Accounting Officer)
* Signatures affixed by Robert A. Wittie pursuant to powers of attorney dated May 13, 1998 and incorporated by reference from Pre-Effective Amendment No. 1 to the registration statement on Form N-2 of Managed High Yield Plus Fund, SEC File 333-5107 and 811-08765, filed May 26, 1998. ** Signature affixed by Robert A. Wittie pursuant to powers of attorney dated May 14, 1999 and incorporated by reference from Post-Effective Amendment No. 18 to the registration statement of PaineWebber Financial Services Growth Fund Inc., SEC File 33-33231 and 811-4587, filed June 1, 1999. EXHIBIT INDEX (1) Articles of Incorporation 1/ (2) (a) Amended and Restated Bylaws 2/ (b) Amendment to Amended and Restated Bylaws dated January 18, 2000 (filed herewith) (3) Voting Trust Agreements - None (4) A copy of the form of Agreement and Plan of Reorganization and Termination is attached as Appendix A to the Prospectus contained in the Registration Statement. (5) (a) Specimen of Share Certificate 2/ (b) Dividend Reinvestment Plan 2/ (c) Portions of the Articles of Incorporation and the By-laws of the Registrant defining the rights of holders of common stock of the Registrant 3/ (6) Investment Advisory and Administration Contract (filed herewith) (7) (a) Underwriting Agreement (filed herewith) (b) Amended and Restated Master Agreement among Underwriters (filed herewith) (c) Amended and Restated Master Selected Dealer Agreement (filed herewith) (8) Bonus, profit sharing or pension plans - None (9) Custodian Agreement (filed herewith) (10) Not Applicable (11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the legality of securities being registered (filed herewith) (12) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax matters in connection with Managed High Yield Plus Fund Inc., and Managed High Yield Fund Inc. (to be filed) (13) (a) Transfer Agency Agreement (filed herewith) (b) Revolving Credit and Security Agreement (filed herewith) (c) Amendment to Revolving Credit and Security Agreement (filed herewith) (14) Consent of Independent Auditors (filed herewith) (15) Financial statements omitted from part B - None (16) Powers of Attorney 4/ - ----------------------------- 1/ Incorporated by reference from the Registration Statement on Form N-2 as filed May 24, 1998. 2/ Incorporated by reference to the Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2, filed June 24, 1998. 3/ Incorporated by reference from Article VI of Registrant's Articles of Incorporation and from Articles II and VI of the Amended and Restated By-laws. 4/ Incorporated by reference from Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 as filed May 26, 1998. EX-99.2 2 Exhibit No. 2(b) AMENDEMENT TO AMENDED AND RESTATED BYLAWS MANAGED HIGH YIELD PLUS FUND INC. CERTIFICATE OF VICE PRESIDENT AND SECRETARY I, Dianne E. O'Donnell, Vice President and Secretary of Managed High Yield Plus Fund Inc. ("Fund"), hereby certify that, at a duly convened meeting of the Board of Directors of the Fund held on December 17, 1999 the Directors adopted the following resolutions: RESOLVED, that it is advisable and in the best interests of the Fund and its stockholders to amend Article II, Section 2 of the Fund's Amended and Restated Bylaws to read as follows: Special meetings of the stockholders may be called by the Secretary upon the written request of the holders of shares entitled to vote a majority of all the votes entitled to be cast at such meeting, provided that (1) such request shall state the purposes of such meeting and the matters proposed to be acted on, and (2) the stockholders requesting such meeting shall have paid to the Corporation the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine. ; and be it further RESOLVED, that it is advisable and in the best interests of the Fund and its stockholders to amend the second sentence of Article II, Section 4 of the Fund's Amended and Restated Bylaws to read as follows: Subject to the rules established by the Chairman of the stockholders' meeting, in the absence of a quorum, the holders of a majority of shares entitled to vote at the meeting and present in person or by proxy, or, if no stockholder entitled to vote is present in person or by proxy, any officer present entitled to preside or act as secretary of such meeting may adjourn the meeting without determining the date of the new meeting or from time to time without further notice to a date not more than 120 days after the original record date. ; and be it further RESOLVED, that it is advisable and in the best interests of the Fund and its stockholders to amend the Fund's Amended and Restated Bylaws to create Article II, Section 11, which will read as follows: Section 11. Organization. At every meeting of stockholders, the Chairman of the Board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the Chairman of the Board, one of the following present shall conduct the meeting in the order stated: the Vice Chairman, if there be one, the President, Vice Presidents, in their order of rank and seniority, or, in the absence of such Director or officers, a Chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as Chairman, and the Secretary, or in his or her absence, an assistant secretary, or in the absence of both the Secretary and assistant secretaries, a person appointed by the Chairman shall act as Secretary of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the Chairman of the meeting. The Chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of such Chairman, are appropriate for the proper conduct of the meeting, including, without limitation, (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies or other such persons as the Chairman of the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote on any such matter, their duly authorized proxies or other such persons as the Chairman of the meeting may determine; (d) limiting the time allotted to questions or comments by participants; (e) maintaining order and security at the meeting; and (f) recessing or adjourning the meeting to a later date, time and place announced by the Chairman of the meeting. Unless otherwise determined by the Chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. Dated: January 18, 2000 -------------------- By: /s/ Dianne E. O'Donnell ---------------------------- Dianne E. O'Donnell Vice President and Secretary Managed High Yield Plus Fund Inc. New York, New York (ss) Subscribed and sworn before me this 18th day of January, 2000. /s/ Victoria Drake -------------------- Notary Public Victoria Drake Notary Public, State of New York No. 31-5060750 Qualified in New York County Commission Expires May 20, 2000 EX-99.6 3 Exhibit No. 6 INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT Contract made as of June 22, 1998 between MANAGED HIGH YIELD PLUS FUND INC., a Maryland corporation ("Fund"), and MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation registered as a broker-dealer under the Securities Exchange Act of 1934, as amended ("1934 Act"), and as an investment adviser under the Investment Advisers Act of 1940, as amended. WHEREAS the Fund is registered under the Investment Company Act of 1940, as amended ("1940 Act"), as a closed-end, diversified management investment company, and intends to register shares of its common stock ("Shares") for sale to the public under the Securities Act of 1933, as amended ("1933 Act"); and WHEREAS the Fund desires to retain Mitchell Hutchins as investment adviser and administrator to furnish certain administrative, investment advisory and portfolio management services to the Fund, and Mitchell Hutchins is willing to furnish such services; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed between the parties hereto as follows: 1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as investment adviser and administrator of the Fund for the period and on the terms set forth in this Contract. Mitchell Hutchins accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided. 2. DUTIES AS INVESTMENT ADVISER. (a) Subject to the supervision of the Fund's board of directors ("Board"), Mitchell Hutchins will provide a continuous investment program for the Fund, including investment research and management with respect to all securities and investments and cash equivalents in the Fund. Mitchell Hutchins will determine from time to time what securities and other investments will be purchased, retained or sold by the Fund. (b) Mitchell Hutchins agrees that in placing orders with brokers, it will attempt to obtain the best net result in terms of price and execution; provided that Mitchell Hutchins may, in its discretion, use brokers who provide the Fund with research, analysis, advice and similar services to execute portfolio transactions on behalf of the Fund, and Mitchell Hutchins may pay to those brokers in return for brokerage and research services a higher commission than may be charged by other brokers, subject to Mitchell Hutchins' determining in good faith that such commission is reasonable in terms either of the particular transaction or of the overall responsibility of Mitchell Hutchins to the Fund and its other clients and that the total commissions paid by such Series will be reasonable in relation to the benefits to the Fund over the long term. In no instance will portfolio securities be purchased from or sold to Mitchell Hutchins, or any affiliated person thereof, except in accordance with the federal securities laws and the rules and regulations thereunder. Whenever Mitchell Hutchins simultaneously places orders to purchase or sell the same security on behalf of the Fund and one or more other accounts advised by Mitchell Hutchins, such orders will be allocated as to price and amount among all such accounts in a manner believed to be equitable to each account. The Fund recognizes that in some cases this procedure may adversely affect the results obtained for the Fund. (c) Mitchell Hutchins will oversee the maintenance of all books and records with respect to the securities transactions of the Fund, and will furnish the Board with such periodic and special reports as the Board reasonably may request. In compliance with the requirements of Rule 31a-3 under the 1940 Act, Mitchell Hutchins hereby agrees that all records which it maintains for the Fund are the property of the Fund, agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any records which it maintains for the Fund and which are required to be maintained by Rule 31a-1 under the 1940 Act and further agrees to surrender promptly to the Fund any records which it maintains for the Fund upon request by the Fund. (d) Mitchell Hutchins will oversee the computation of the net asset value and the net income of the Fund as described in the currently effective registration statement of the Fund under the 1933 Act and the 1940 Act and any amendments or supplements thereto ("Registration Statement") or as more frequently requested by the Board. -2- (e) The Fund hereby authorizes Mitchell Hutchins and any entity or person associated with Mitchell Hutchins which is a member of a national securities exchange to effect any transaction on such exchange for the account of the Fund, which transaction is permitted by Section 11(a) of the 1934 Act, and the Fund hereby consents to the retention of compensation by Mitchell Hutchins or any person or entity associated with Mitchell Hutchins. 3. DUTIES AS ADMINISTRATOR. Mitchell Hutchins will administer the affairs of the Fund subject to the supervision of the Board and the following understandings: (a) Mitchell Hutchins will supervise all aspects of the operations of the Fund, including oversight of transfer agency, custodial and accounting services, except as hereinafter set forth; provided, however, that nothing herein contained shall be deemed to relieve or deprive the Board of its responsibility for and control of the conduct of the affairs of the Fund. (b) Mitchell Hutchins will provide the Fund with such corporate, administrative and clerical personnel (including officers of the Fund) and services as are reasonably deemed necessary or advisable by the Board, including the maintenance of certain books and records of the Fund. (c) Mitchell Hutchins will arrange, but not pay, for the periodic preparation, updating, filing and dissemination (as applicable) of the Fund's Registration Statement, proxy material, tax returns and required reports to the Fund's shareholders and the Securities and Exchange Commission and other appropriate federal or state regulatory authorities. (d) Mitchell Hutchins will provide the Fund with, or obtain for it, adequate office space and all necessary office equipment and services, including telephone service, heat, utilities, stationery supplies and similar items. (e) Mitchell Hutchins will provide the Board on a regular basis with economic and investment analyses and reports and make available to the Board upon request any economic, statistical and investment services normally available to institutional or other customers of Mitchell Hutchins. 4. FURTHER DUTIES. In all matters relating to the performance of this Contract, Mitchell Hutchins will act in conformity with the Articles of Incorporation, By-Laws and Registration Statement of the Fund and with the instructions and directions of the Board and will comply with the requirements of the 1940 Act, the rules thereunder, and all other applicable federal and state laws and regulations. 5. DELEGATION OF MITCHELL HUTCHINS' DUTIES AS INVESTMENT ADVISER AND ADMINISTRATOR. Mitchell Hutchins may enter into one or more contracts ("Sub-Advisory or Sub-Administration Contracts") with a sub-adviser or sub-administrator in which Mitchell Hutchins delegates to such sub-adviser or sub-administrator any or all its duties specified in Paragraphs 2 and 3 of this Contract, provided that each Sub-Advisory or Sub-Administration Contract imposes on the sub-adviser or sub-administrator bound thereby all applicable duties and conditions to which Mitchell Hutchins is subject by Paragraphs 2, 3 and 4 of this Contract, and further provided that each Sub-Advisory or Sub-Administration Contract meets all requirements of the 1940 Act and rules thereunder. 6. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to furnish similar services to others so long as its services under this Contract are not impaired thereby. Nothing in this Contract shall limit or restrict the right of any director, officer or employee of Mitchell Hutchins, who may also be a director, officer or employee of the Fund, to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any other business, whether of a similar nature or a dissimilar nature. 7. EXPENSES. -------- (a) During the term of this Contract, the Fund will bear all expenses, not specifically assumed by Mitchell Hutchins, incurred in its operations and the offering of its Shares or any preferred stock. (b) Expenses borne by the Fund will include but not be limited to the following (which shall be in addition to the fees payable to and expenses incurred on behalf of the Fund by Mitchell Hutchins under the Contract): (i) the cost (including brokerage commissions) of securities purchased or sold by the Fund and any losses incurred in connection therewith; (ii) fees payable to and expenses incurred on behalf of the Fund by Mitchell Hutchins under this Contract; (iii) organizational and offering expenses of the Fund, whether or not advanced by Mitchell Hutchins; (iv) filing fees and expenses relating to the registrations and qualification of the Fund's shares and the Fund under federal and/or state securities laws and maintaining such registration and qualifications; (v) fees and salaries payable to the Fund's directors and officers who are not interested persons of the Fund or Mitchell Hutchins; (vi) all expenses incurred in connection with the Fund's directors' services, -3- including travel expenses; (vii) taxes (including any income or franchise taxes) and governmental fees; (viii) costs of any liability, uncollectible items of deposit and other insurance and fidelity bonds; (ix) any costs, expenses or losses arising out of a liability of or claim for damages or other relief asserted against the Fund for violation of any law; (x) legal, accounting and auditing expenses, including legal fees of special counsel for those directors of the Fund who are not interested persons of the Fund; (xi) charges of custodians, transfer agents and other agents (including any lending agent); (xii) costs of preparing share certificates; (xiii) expenses of setting in type and printing prospectuses and supplements thereto, statements of additional information and supplements thereto, reports and proxy materials for existing shareholders; (xiv) costs of mailing prospectuses and supplements thereto, statements of additional information and supplements thereto, reports and proxy materials to existing shareholders; (xv) any extraordinary expenses (including fees and disbursements of counsel, costs of actions, suits or proceedings to which the Fund is a party and the expenses the Fund may incur as a result of its legal obligation to provide indemnification to its officers, directors, agents and shareholders) incurred by the Fund; (xvi) fees, voluntary assessments and other expenses incurred in connection with membership in investment company organizations; (xvii) the cost of mailing and tabulating proxies and costs of meetings of shareholders, the Board and any committees thereof; (xviii) the cost of investment company literature and other publications provided by the Fund to its directors and officers; (xix) costs of mailing, stationery and communications equipment; (xx) expenses incident to any dividend reinvestment plan; (xxi) charges and expenses of any outside pricing service used to value portfolio securities; (xxii) interest on borrowings of the Fund; (xxiii) fees and expenses of listing and maintaining any listing of the Fund's Shares on any national securities exchange; and (xxiv) costs and expenses (including rating agency fees) associated with the issuance of any preferred stock. (c) Mitchell Hutchins will assume the cost of any compensation for services provided to the Fund received by the officers of the Fund and by those directors who are interested persons of the Fund. (d) The payment or assumption by Mitchell Hutchins of any expenses of the Fund that Mitchell Hutchins is not required by this Contract to pay or assume shall not obligate Mitchell Hutchins to pay or assume the same or any similar expense of the Fund on any subsequent occasion. 8. COMPENSATION. ------------ (a) For the services provided and the expenses assumed pursuant to this Contract, the Fund will pay to Mitchell Hutchins a fee, computed weekly and paid monthly, at an annual rate of 0.70% of the Fund's average weekly total assets minus liabilities other than the Fund's aggregate indebtedness constituting leverage. (b) The fee shall be computed weekly and paid monthly to Mitchell Hutchins on or before the first business day of the next succeeding calendar month. (c) If this Contract becomes effective or terminates before the end of any month, the fee for the period from the effective day to the end of the month or from the beginning of such month to the date of termination, as the case may be, shall be prorated according to the proportion which such period bears to the full month in which such effectiveness or termination occurs. 9. LIMITATION OF LIABILITY OF MITCHELL HUTCHINS. Mitchell Hutchins and its delegates, including any Sub-Adviser or Sub-Administrator to the Fund, shall not be liable for any error of judgment or mistake of law or for any loss suffered -4- by the Fund or any of its shareholders, in connection with the matters to which this Contract relates, except to the extent that such a loss results from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Contract. Any person, even though also an officer, director, employee, or agent of Mitchell Hutchins, who may be or become an officer, director, employee or agent of the Fund shall be deemed, when rendering services to the Fund or acting with respect to any business of the Fund, to be rendering such service to or acting solely for the Fund and not as an officer, director, employee, or agent or one under the control or direction of Mitchell Hutchins even though paid by it. 10. DURATION AND TERMINATION. ------------------------ (a) This Contract shall become effective upon the date hereinabove written provided that, this Contract shall not take effect unless it has first been approved (i) by a vote of a majority of those directors of the Fund who are not parties to this Contract or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the Fund's outstanding voting securities. (b) Unless sooner terminated as provided herein, this Contract shall continue in effect for two years from its effective date. Thereafter, if not terminated, this Contract shall continue automatically for successive periods of twelve months each, provided that such continuance is specifically approved at least annually (i) by a vote of a majority of those directors of the Fund who are not parties to this Contract or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval, and (ii) by the Board or by vote of a majority of the outstanding voting securities of the Fund. (c) Notwithstanding the foregoing, this Contract may be terminated at any time, without the payment of any penalty, by vote of the Board or by a vote of a majority of the outstanding voting securities of the Fund on sixty days' written notice to Mitchell Hutchins or by Mitchell Hutchins at any time, without the payment of any penalty, on sixty days' written notice to the Fund. This Contract will automatically terminate in the event of its assignment. 11. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment of this Contract shall be effective until approved by vote of a majority of the Fund's outstanding voting securities. 12. GOVERNING LAW. This Contract shall be construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof, and in accordance with the 1940 Act. To the extent that the applicable laws of the State of Delaware conflict with the applicable provisions of the 1940 Act, the latter shall control. 13. MISCELLANEOUS. The captions in this Contract are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Contract shall be held or made invalid by a court decision, -5- statute, rule or otherwise, the remainder of this Contract shall not be affected thereby. This Contract shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors. As used in this Contract, the terms "majority of the outstanding voting securities," "affiliated person," "interested person," "assignment," "broker," "investment adviser," "national securities exchange," "net assets," "prospectus," "sale," "sell" and "security" shall have the same meaning as such terms have in the 1940 Act, subject to such exemption as may be granted by the Securities and Exchange Commission by any rule, regulation or order. Where the effect of a requirement of the 1940 Act reflected in any provision of this Contract is relaxed by a rule, regulation or order of the Securities and Exchange Commission, whether of special or general application, such provision shall be deemed to incorporate the effect of such rule, regulation or order. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated as of the day and year first above written. Attest: MANAGED HIGH YIELD PLUS FUND INC. /s/ Jennifer Farrell By /s/ Dianne E. O'Donnell - ------------------------ ----------------------------------- Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC. /s/ Andrew S. Novak By /s/ Victoria Schonfeld - ------------------------ ---------------------------------- -6- EX-99.7(A) 4 Exhibit No. 7(a) 26,700,000 SHARES* OF COMMON STOCK MANAGED HIGH YIELD PLUS FUND INC. UNDERWRITING AGREEMENT June 24, 1998 PAINEWEBBER INCORPORATED as Representative of the Several Underwriters named in Schedule 1 hereto c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 Ladies and Gentlemen: Managed High Yield Plus Fund Inc., a Maryland corporation (the "Fund"), proposes to issue and sell to you and the other underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you are acting as representative (the "Representative"), up to 26,700,000 shares of its common stock (the "Firm Shares"), par value $.001 per share (the "Common Shares"). In ----------------------- * Plus an optin to purchase, in the aggregate, up to 4,005,000 additional Commmon Shares to cover over-allotments. addition, the Fund hereby grants to the Underwriters an option (the "Option") to purchase up to an additional 4,005,000 of its Common Shares (the "Option Shares") solely for the purpose of covering over-allotments. The Firm Shares and the Option Shares are referred to collectively herein as the "Shares." Mitchell Hutchins Asset Management Inc., a Delaware corporation (the "Investment Adviser"), will act as the Fund's investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement by and between the Fund and the Investment Adviser, dated as of June 22, 1998 (the "Investment Advisory Agreement"). State Street Bank and Trust Company ("State Street") will act as the custodian (the "Custodian") of the Fund's cash and portfolio assets pursuant to a custody agreement, dated as of June 22, 1998 (the "Custody Agreement"). PNC Bank, National Association, will act as the Fund's dividend disbursing agent, transfer agent and registrar (the "Transfer Agent") pursuant to a transfer agency agreement, dated June 22, 1998 (the "Transfer Agency Agreement"). The Fund and the Investment Adviser each hereby confirms as follows their agreements with the Representative and the several other Underwriters. 1. SALE AND PURCHASE; COMPENSATION ------------------------------- (a) The Fund will issue and sell to each Underwriter, and each Underwriter will purchase from the Fund, the number of Firm Shares opposite such Underwriter's name in Schedule 1 hereto, at the purchase price of $15.00 per share of Common Shares. (b) The Fund grants to the Underwriters the Option to purchase all or any part of the Option Shares for the same consideration per share as for the Firm Shares. The Option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters. The number of Option Shares (adjusted by the Representative to eliminate fractions) to be purchased by each Underwriter will be the same percentage of the aggregate number of Option Shares being sold as such Underwriter is obligated to purchase of the Firm Shares. Such Option may be exercised in whole or in part, only to cover over-allotments, at any time or from time to time on or before the 45th day after the date of this Underwriting Agreement, upon written or telefacsimile notice (the "Option Shares Notice") from the Representative to the Fund no later than 12:00 noon, New York City time, at least two and not more than five business days before the date 2 specified for closing in the Option Shares Notice (the "Option Shares Closing Date"), setting forth the number of Option Shares to be purchased and the time and date of such purchase. Upon delivery and receipt of the Option Shares Notice, the Fund will issue and sell to each Underwriter, and each Underwriter will purchase from the Fund, on the Option Shares Closing Date, its portion of the number of Option Shares set forth in the Option Shares Notice. (c) The obligations of the Underwriters under this Underwriting Agreement are several and not joint and are undertaken on the basis of the representations and are subject to the conditions set forth in this Underwriting Agreement. (d) The Investment Adviser agrees to make the payments to the Underwriters when and as required by Section 2 hereof. 2. PAYMENT AND DELIVERY. Delivery by the Fund of the Firm Shares (the "Firm Shares Closing") to the Representative for the accounts of the Underwriters against payment of the purchase price by wire transfer of Federal Funds or similar same day funds to the Fund for the Firm Shares, will take place at the offices of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York, or through the facilities of the Depository Trust Company or another mutually agreeable facility, at 9:00 a.m., New York City time, on the third business day following the date of this Underwriting Agreement, or at such time on such other date, not later than ten business days after the date of this Underwriting Agreement, as may be agreed on by the Fund and the Representative (the "Firm Shares Closing Date"). If and to the extent that the Option is exercised, delivery of the Option Shares and payment by the Underwriters (in the manner specified above) will take place at the offices or through the facilities specified above for the Firm Shares Closing at the time and date (which may be the Firm Shares Closing Date) specified in the Option Shares Notice. Any Option Shares Closing Date may not be later than three business days following the exercise of the related Option. The Firm Shares Closing Date and any Option Shares Closing Date are called the "Closing Dates." Certificates evidencing Common Shares will be in definitive form (or temporary form acceptable to the New York Stock Exchange), registered in such names and in such denominations as the Representative requests at least three full business days before the Firm Shares Closing Date or, in the case of Option Shares, on the day of notice of exercise of the Option as described in Section 3 1(b), and will be made available to the Representative for checking and packaging, at a place in New York City designated by the Representative, at least one full business day before the relevant Closing Date. Simultaneous with delivery to the Underwriters of and payment by the Underwriters for (i) Firm Shares on the Firm Shares Closing Date and (ii) Option Shares on the Option Shares Closing Date, PaineWebber Incorporated ("PaineWebber") will pay to the Underwriters an amount equal to 5% of the purchase price per Share for each Share to be purchased by the Underwriters on such date by wire transfer of Federal Funds or similar same-day funds on such Firm Shares Closing Date or Option Shares Closing Date, as the case may be, to the order of PaineWebber Incorporated. 3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The Fund has filed with the Securities and Exchange Commission (the "Commission"), pursuant to the Securities Act of 1933, as amended (the "Securities Act"), the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the published rules and regulations adopted by the Commission under the Securities Act (the "Securities Act Rules") and the Investment Company Act (the "Investment Company Act Rules"), a Notification of Registration on Form N-8A (the "Notification" pursuant to Section 8 of the Investment Company Act and a registration statement on Form N-2 (File Nos. 333-51017 and 811-08765) relating to the Shares (the "registration statement"), including a preliminary prospectus (including any preliminary statement of additional information), and such amendments to such registration statement as may have been required to the date of this Underwriting Agreement. The preliminary prospectus (including any preliminary statement of additional information) is to be used in connection with the offering and sale of the Shares. The term "Preliminary Prospectus" as used herein means any preliminary prospectus (including any preliminary statement of additional information) included at any time as a part of the registration statement and any preliminary prospectus (including any preliminary statement of additional information) omitted therefrom pursuant to the Securities Act Rules. The Fund has furnished the Representative copies of such registration statement, each amendment to such registration statement filed by the Fund with the Commission and the Preliminary Prospectus filed by the Fund with the Commission or used by the Fund. If the registration statement has not become effective, a further amendment (the "Final Amendment") to such registration statement, including the forms of final prospectus (including any 4 final statement of additional information), necessary to permit such registration statement to become effective will promptly be filed by the Fund with the Commission. If such registration statement has become effective and any prospectus (including any statement of additional information) contained therein omits certain information at the time of effectiveness pursuant to Rule 430A of the Securities Act Rules, a final prospectus (the "Rule 430A Prospectus") containing such omitted information will be filed by the Fund with the Commission in accordance with Rule 497(h) of the Securities Act Rules. The registration statement as amended at the time it becomes or became effective (the "Effective Date"), including financial statements and all exhibits, and any information deemed to be included by Rule 430A, is called the "Registration Statement." The term "Prospectus" means the prospectus (including any statement of additional information) in the form in which it is first filed with the Commission pursuant to Rule 497(b), (h) or (j) of the Securities Act Rules, as the case may be. The Fund and the Investment Adviser understand that the Underwriters propose to make a public offering of the Firm Shares, as described in the Prospectus, as soon after the Effective Date (or, if later, after the date this Underwriting Agreement is signed) as the Representative deems advisable. The Fund and the Investment Adviser confirm that the Underwriters and dealers have been authorized to distribute the Preliminary Prospectus relating to the Shares included in Pre-Effective Amendment No. 1 to the registration statement and are authorized to distribute the Prospectus and any amendments or supplements thereto. 4. REPRESENTATIONS. --------------- (a) Each of the Fund and the Investment Adviser jointly and severally represents to each Underwriter as follows: (i) On (A) the Effective Date and the date on which the Prospectus is first filed with the Commission pursuant to Rule 497(b), (h) or (j) of the Securities Act Rules, as the case may be, (B) the date on which any post-effective amendment to the Registration Statement (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the Shares is completed) became or becomes effective or any amendment or supplement to the Prospectus was or is filed with the Commission and (C) the Closing Dates, the Registration Statement, the Prospectus and any such amendment or supplement thereto and the Notification complied or will comply in all material respects with the 5 requirements of the Securities Act, the Investment Company Act, the Securities Act Rules and the Investment Company Act Rules, as the case may be. On the Effective Date and on the date that any post-effective amendment to the Registration Statement (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the Shares is completed) became or becomes effective, neither the Registration Statement nor any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated in it or necessary to make the statements in it not misleading. At the Effective Date and, if applicable, the date the Prospectus or any amendment or supplement to the Prospectus was or is filed with the Commission and at the Closing Dates, the Prospectus did not or will not, as the case may be, contain any untrue statement of a material fact or omit to state a material fact required to be stated in it or necessary to make the statements in it, in light of the circumstances under which they were made, not misleading. The foregoing representations in this Section 4(a)(i) do not apply to statements or omissions relating to the Underwriters made in reliance on and in conformity with information furnished in writing to the Fund by the Representative expressly for use in the Registration Statement, the Prospectus, or any amendments or supplements thereto. (ii) The Fund has been duly organized, is validly existing and in good standing as a corporation under the laws of the State of Maryland, with full power and authority to conduct all the activities conducted by it, to own or lease all assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus, and the Fund is duly licensed and qualified to do business and in good standing as a foreign corporation or otherwise in each jurisdiction in which its ownership or leasing of property or its conducting of business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the Fund, and the Fund owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations, whether foreign or domestic, necessary to carry on its business as contemplated in the 6 Prospectus. The Fund has no subsidiaries. (iii) The capitalization of the Fund is as set forth in the Registration Statement and the Prospectus. The Common Shares of the Fund conform in all material respects to the description of them in the Prospectus. All the outstanding Common Shares have been duly authorized and are validly issued, fully paid and nonassessable. The Shares to be issued and delivered to and paid for by the Underwriters in accordance with this Underwriting Agreement against payment therefor as provided by this Underwriting Agreement have been duly authorized and when issued and delivered to the Underwriters will have been validly issued and will be fully paid and nonassessable. No person is entitled to any preemptive or other similar rights with respect to the Shares. (iv) The Fund is duly registered with the Commission under the Investment Company Act as a diversified, closed-end management investment company, and, subject to the filing of the Final Amendment, if not already filed, all action under the Securities Act, the Investment Company Act, the Securities Act Rules and the Investment Company Act Rules, as the case may be, necessary to make the public offering and consummate the sale of the Shares as provided in this Underwriting Agreement has or will have been taken by the Fund. (v) The Fund has full power and authority to enter into each of the Underwriting Agreement, the Investment Advisory Agreement, the Custody Agreement and the Transfer Agency Agreement (collectively, the "Fund Agreements") and to perform all of the terms and provisions hereof and thereof to be carried out by it and (A) each Fund Agreement has been duly and validly authorized, executed and delivered by the Fund, (B) each Fund Agreement does not violate in any material respect any of the applicable provisions of the Investment Company Act, the Investment Advisers Act of 1940 (the "Advisers Act"), the Investment Company Act Rules and the rules and regulations adopted by the Commission under the Advisers Act (the "Advisers Act Rules"), as the case may be, and (C) assuming due authorization, execution and delivery by the other parties thereto, each Fund Agreement constitutes the legal, valid and binding 7 obligation of the Fund enforceable in accordance with its terms, (1) subject, as to enforcement, to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law) and (2) except as rights to indemnity thereunder may be limited by federal or state securities laws. (vi) None of (A) the execution and delivery by the Fund of the Fund Agreements, (B) the issue and sale by the Fund of the Shares as contemplated by this Underwriting Agreement and (C) the performance by the Fund of its obligations under the Fund Agreements or consummation by the Fund of the other transactions contemplated by the Fund Agreements conflicts with or will conflict with, or results or will result in a breach of, the Articles of Incorporation or the By-laws of the Fund or any agreement or instrument to which the Fund is a party or by which the Fund is bound, or any law, rule or regulation, or order of any court, governmental instrumentality, securities exchange or association or arbitrator, whether foreign or domestic, applicable to the Fund, other than state or foreign securities or "blue sky" laws applicable in connection with the purchase and distribution of the Shares by the Underwriters pursuant to this Underwriting Agreement. (vii) The Fund is not currently in breach of, or in default under, any written agreement or instrument to which it is a party or by which it or its property is bound or affected. (viii) No person has any right to the registration of any securities of the Fund because of the filing of the registration statement. (ix) No consent, approval, authorization or order of any court or governmental agency or body or securities exchange or association, whether foreign or domestic, is required by the Fund for the consummation by the Fund of the transactions to be performed by the Fund or the performance by the Fund of all the terms and provisions to be performed by or on behalf of it in each case as contemplated in the Fund Agreements, except such as (A) have been obtained under the Securities 8 Act, the Investment Company Act, the Advisers Act, the Securities Act Rules, the Investment Company Act Rules, and the Advisers Act Rules, and (B) may be required by the New York Stock Exchange or under state or foreign securities or "blue sky" laws, in connection with the purchase and distribution of the Shares by the Underwriters pursuant to this Underwriting Agreement. (x) The Shares are duly authorized for listing, subject to official notice of issuance, on the New York Stock Exchange and the Fund's Registration Statement on Form 8-A, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), has become effective. (xi) Ernst & Young LLP, whose report appears in the Prospectus, are independent public accountants with respect to the Fund as required by the Securities Act, the Investment Company Act, the Securities Act Rules and the Investment Company Act Rules. (xii) The statement of assets and liabilities included in the Registration Statement and the Prospectus presents fairly in all material respects, in accordance with generally accepted accounting principles in the United States applied on a consistent basis, the financial position of the Fund as at the date indicated. (xiii) The Fund will maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xiv) Since the date as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated 9 therein, (A) there has been no material adverse change in the condition, financial or otherwise, business affairs or business prospects of the Fund, whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Fund other than those in the ordinary course of its business and (C) there has been no dividend or distribution of any kind declared, paid or made on any class of its capital shares. (xv) There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending, or, to the knowledge of the Fund, threatened against or affecting the Fund, which (A) might result in any material adverse change in the condition, financial or otherwise, business affairs or business prospects of the Fund or might materially adversely affect the properties or assets of the Fund or (B) is of a character required to be described in the Registration Statement or the Prospectus; and there are no contracts, franchises or other documents that are of a character required to be described in, or that are required to be filed as exhibits to, the Registration Statement that have not been described or filed as required. (xvi) Except for stabilization transactions conducted by the Underwriters, and except for tender offers, Share repurchases and the issuance or purchase of Shares pursuant to the Fund's dividend reinvestment plan ("DRP") effected following the date on which the distribution of the Shares is completed in accordance with the policies of the Fund as set forth in the Prospectus, the Fund has not taken and will not take, directly or indirectly, any action designed or which might be reasonably expected to cause or result in, or which will constitute, stabilization or manipulation of the price of the Common Shares. (xvii) The Fund intends to direct the investment of the proceeds of the offering of the Shares in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). 10 (xviii) To the knowledge of the Fund after due inquiry, no advertising, sales literature or other promotional materials (excluding broker kits, which include the broker fact sheet, road show slides or road show tapes) were authorized or prepared by or on behalf of the Fund and the Investment Adviser or any representative thereof for use in connection with the public offering or sale of the Shares other than the definitive client brochure, a draft of which was filed with the NASD on May 19, 1998, and final investor prospecting letters, drafts of which were filed with the NASD on June 8, 1998 (collectively, the "sales materials"); the sales materials complied and comply in all material respects with the applicable requirements of the Securities Act, the Securities Act Rules and the rules and interpretations of the NASD; and no broker kits, road show slides, road show tapes or sales materials authorized or prepared by the Fund or authorized or prepared on behalf of the Fund by the Investment Adviser or any representative thereof for use in connection with the public offering or sale of the Shares contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. (b) The Investment Adviser represents to each Underwriter as follows: (i) The Investment Adviser has been duly organized, is validly existing and in good standing as a corporation under the laws of the State of Delaware with full power and authority to conduct all of the activities conducted by it, to own or lease all of the assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus, and the Investment Adviser is duly licensed and qualified as a foreign corporation and in good standing in each jurisdiction in which it is required to be so qualified, except to the extent that failure to be so qualified or be in good standing would not have a material adverse affect on the Investment Adviser; and the Investment Adviser owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations, whether foreign or domestic, necessary to carry on its business as contemplated in the Registration Statement and the Prospectus. 11 (ii) The Investment Adviser is (A) duly registered as an investment adviser under the Advisers Act and (B) not prohibited by the Advisers Act, the Investment Company Act, the Advisers Act Rules or the Investment Company Act Rules from acting as the investment adviser for the Fund as contemplated by the Investment Advisory Agreement, the Registration Statement and the Prospectus. (iii) The Investment Adviser has full power and authority to enter into each of this Underwriting Agreement and the Investment Advisory Agreement and to carry out all the terms and provisions hereof and thereof to be carried out by it, and each such agreement has been duly and validly authorized, executed and delivered by the Investment Adviser; each of the Investment Advisory Agreement and this Underwriting Agreement does not violate in any material respect any of the applicable provisions of the Investment Company Act, the Advisers Act, the Investment Company Act Rules and the Advisers Act Rules; and assuming due authorization, execution and delivery by the other parties thereto, each of this Underwriting Agreement and the Investment Advisory Agreement constitutes a legal, valid and binding obligation of the Investment Adviser, enforceable in accordance with its terms, (1) subject, as to enforcement, to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law) and (2) except as rights to indemnity thereunder may be limited by federal or state securities laws. (iv) Neither (A) the execution and delivery by the Investment Adviser of the Underwriting Agreement or the Investment Advisory Agreement by the Investment Adviser nor (B) the consummation by the Investment Adviser of the transactions contemplated by, or the performance of its obligations under such agreements conflicts or will conflict with, or results or will result in a breach of, the Articles of Incorporation or By-Laws of the Investment Adviser or any agreement or instrument to which the Investment Adviser is a party or by which the Investment Adviser is bound, or any law, rule or regulation, or order of any court, governmental instrumentality, securities exchange or 12 association or arbitrator, whether foreign or domestic, applicable to the Investment Adviser. (v) No consent, approval, authorization or order of any court, governmental agency or body or securities exchange or association, whether foreign or domestic, is required for the consummation of the transactions contemplated in, or the performance by the Investment Adviser of its obligations under, the Underwriting Agreement or the Investment Advisory Agreement, as the case may be, except such as (A) have been obtained under the Investment Company Act, the Advisers Act, the Securities Act, the Investment Company Act Rules, the Advisers Act Rules and the Securities Act Rules, and (B) may be required by the New York Stock Exchange or under state or foreign securities or "blue sky" laws, in connection with the purchase and distribution of the Shares by the Underwriters pursuant to this Underwriting Agreement. (vi) The description of the Investment Adviser and its business in the Registration Statement and the Prospectus complies with the requirements of the Securities Act, the Investment Company Act, the Securities Act Rules and the Investment Company Act Rules and does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. (vii) There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to the knowledge of the Investment Adviser, threatened against or affecting the Investment Adviser of a nature required to be disclosed in the Registration Statement or Prospectus or that might result in any material adverse change in the condition, financial or otherwise, business affairs or business prospects of the Investment Adviser or the ability of the Investment Adviser to fulfill its respective obligations under the Underwriting Agreement or under the Investment Advisory Agreement. (viii) Except for stabilization activities conducted by the Underwriters and except for tender offers, Share repurchases and the issuance or purchase of Shares pursuant to the Fund's dividend 13 reinvestment plan ("DRP") effected following the date on which the distribution of the Shares is completed in accordance with the policies of the Fund as set forth in the Prospectus, the Investment Adviser has not taken and will not take, directly or indirectly, any action designed, or which might reasonably be expected to cause or result in, or which will constitute, stabilization or manipulation of the price of the Common Shares. 5. AGREEMENTS OF THE PARTIES. ------------------------- (a) If the registration statement relating to the Shares has not yet become effective, the Fund will promptly file the Final Amendment, if not previously filed, with the Commission, and will use its best efforts to cause such registration statement to become effective and, as soon as the Fund is advised, will advise the Representative when the Registration Statement or any amendment thereto has become effective. If the Registration Statement has become effective and the Prospectus contained therein omits certain information at the time of effectiveness pursuant to Rule 430A of the Securities Act Rules, the Fund will file a 430A Prospectus pursuant to Rule 497(h) of the Securities Act Rules as promptly as practicable, but no later than the second business day following the earlier of the date of the determination of the offering price of the Shares or the date the Prospectus is first used after the Effective Date. If the Registration Statement has become effective and the Prospectus contained therein does not so omit such information, the Fund will file a Prospectus pursuant to Rule 497(b) or (j) of the Securities Act Rules as promptly as practicable, but no later than the fifth business day following the date of the later of the Effective Date or the commencement of the public offering of the Shares after the Effective Date. In either case, the Fund will provide the Representative satisfactory evidence of the filing. The Fund will not file with the Commission any Prospectus or any other amendment (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which distribution of the Shares is completed) or supplement to the Registration Statement or the Prospectus unless a copy has first been submitted to the Representative a reasonable time before its filing and the Representative has not objected to it in writing within a reasonable time after receiving the copy. (b) For the period of three years from the date hereof, the Fund will advise the Representative promptly (1) of the issuance by the Commission of any order in respect of the Fund or the Investment Adviser which 14 relates to the Fund, or which relates to any arrangements or proposed arrangements involving the Fund or the Investment Adviser, (2) of the initiation or threatening of any proceedings for, or receipt by the Fund of any notice with respect to, the suspension of the qualification of the Shares for sale in any jurisdiction or the issuance of any order by the Commission suspending the effectiveness of the Registration Statement, (3) of receipt by the Fund, or any representative or attorney of the Fund, of any other communication from the Commission relating to the Fund, the Registration Statement, the Notification, any Preliminary Prospectus, the Prospectus or to the transactions contemplated by this Underwriting Agreement and (4) the issuance by any court, regulatory body, administrative agency or other governmental agency or body, whether foreign or domestic, of any order, ruling or decree, or the threat to initiate any proceedings with respect thereto, regarding the Fund, which relates to the Fund or any arrangements or proposed arrangements involving the Fund. The Fund will make every reasonable effort to prevent the issuance of any order suspending the effectiveness of the Registration Statement and, if any such order is issued, to obtain its lifting as soon as possible. (c) If not delivered prior to the date of this Underwriting Agreement, the Fund will deliver to the Representative, without charge, a signed copy of the registration statement and the Notification and of any amendments (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the Shares is completed) to either the Registration Statement or the Notification (including all exhibits filed with any such document) and as many conformed copies of the registration statement and any amendments thereto (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the Shares is completed) (excluding exhibits) as the Representative may reasonably request. (d) During such period as a prospectus is required by law to be delivered by an underwriter or a dealer, the Fund will deliver, without charge, to the Representative, the Underwriters and any dealers, at such office or offices as the Representative may designate, as many copies of the Prospectus as the Representative may reasonably request, and, if any event occurs during such period as a result of which it is necessary to amend or supplement the Prospectus, in order to make the statements therein, in light of the circumstances existing when such prospectus is delivered to a purchaser of Shares, not misleading in any material respect, or if during such period it is 15 necessary to amend or supplement the prospectus to comply with the Securities Act, the Investment Company Act, the Securities Act Rules or the Investment Company Act Rules, the Fund promptly will prepare, submit to the Representative, file with the Commission and deliver, without charge, to the Underwriters and to dealers (whose names and addresses the Representative will furnish to the Fund) to whom Shares may have been sold by the Underwriters, and to other dealers on request, amendments or supplements to the Prospectus so that the statements in such Prospectus, as so amended or supplemented, will not, in light of the circumstances existing when such Prospectus is delivered to a purchaser, be misleading in any material respect and will comply with the Securities Act, the Investment Company Act, the Securities Act Rules and the Investment Company Act Rules. Delivery by the Underwriters of any such amendments or supplements to the Prospectus will not constitute a waiver of any of the conditions in Section 6 hereof. (e) The Fund will make generally available to holders of the Fund's securities, as soon as practicable but in no event later than the last day of the 18th full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement, if applicable, satisfying the provisions of Section 11(a) of the Securities Act and, at the option of the Fund, Rule 158 of the Securities Act Rules. (f) The Fund will take such actions as the Representative reasonably requests in order to qualify the Shares for offer and sale under the securities or "blue sky" laws of such jurisdictions as the Representative reasonably designates; provided that the Fund shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (g) If the transactions contemplated by this Underwriting Agreement are consummated, PaineWebber will pay all costs and expenses incident to the performance of the obligations of the Fund under this Underwriting Agreement, including but not limited to costs and expenses of or relating to (1) the preparation, printing and filing of the registration statement and exhibits to it, each Preliminary Prospectus, the Prospectus and all amendments and supplements thereto, (2) the issuance of the Shares and the preparation and delivery of certificates for the Shares, (3) the registration or qualification of the Shares for offer and sale under the securities or "blue sky" laws of the jurisdictions referred to in the foregoing paragraph, including the fees and disbursements of counsel for the Underwriters in that connection, and the preparation and printing of preliminary and supplemental "blue sky" memoranda, 16 (4) the furnishing (including costs of design, production, shipping and mailing) to the Underwriters and dealers of copies of each Preliminary Prospectus relating to the Shares, the sales materials, the Prospectus, and all amendments or supplements to the Prospectus, and of the other documents required by this Section to be so furnished, (5) the filing requirements of the National Association of Securities Dealers, Inc., in connection with its review of the financing, including filing fees and the fees, disbursements and other charges of counsel for the Underwriters in that connection, (6) all transfer taxes, if any, with respect to the sale and delivery of the Shares to the Underwriters, (7) the listing of the Shares on the New York Stock Exchange, and (8) the transfer agent for the Shares. (h) If the transactions contemplated by this Underwriting Agreement are not consummated, except as otherwise provided herein, no party will be under any liability to any other party, except that (1) if this Underwriting Agreement is terminated by (x) the Fund or the Investment Adviser pursuant to any of the provisions hereof (otherwise than pursuant to Section 9 hereof) or (y) by the Representative or the Underwriters because of any inability, failure or refusal on the part of the Fund or the Investment Adviser to comply with its terms or because any of the conditions in Section 6 are not satisfied, PaineWebber and the Investment Adviser, jointly and severally, will reimburse the Underwriters for all out-of-pocket expenses (including the reasonable fees, disbursements and other charges of their counsel) reasonably incurred by them in connection with the proposed purchase and sale of the Shares and (2) no Underwriter who has failed or refused to purchase the Shares agreed to be purchased by it under this Underwriting Agreement, in breach of its obligations pursuant to this Underwriting Agreement, will be relieved of liability to the Fund and the Investment Adviser and the other Underwriters for damages occasioned by its default. (i) Without the prior written consent of the Representative, the Fund will not offer, sell or register with the Commission, or announce an offering of, any equity securities of the Fund, within 180 days after the Effective Date, except for the Shares as described in the Prospectus and any issuances of Common Shares pursuant to the dividend reinvestment plan established by the Fund. (j) The Fund will use its best efforts to list the Shares on the New York Stock Exchange and comply with the rules and regulations of such exchange. (k) The Fund will direct the investment of the net proceeds of the offering of the Shares in such a manner as to comply with the investment 17 objective and policies of the Fund as described in the Prospectus. 6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters to purchase the Shares are subject to the accuracy on the date of this Underwriting Agreement, and on the Closing Dates, of the representations of the Fund and the Investment Adviser in this Underwriting Agreement, to the accuracy and completeness of all statements made by the Fund or the Investment Adviser or any of their respective officers in any certificate delivered to the Representative or their counsel pursuant to this Underwriting Agreement, to performance by the Fund and the Investment Adviser of their respective obligations under this Underwriting Agreement and to each of the following additional conditions: (a) The registration statement must have become effective by 5:30 p.m., New York City time, on the date of this Underwriting Agreement or such later date and time as the Representative consents to in writing. The Prospectus must have been filed in accordance with Rule 497(b), (h) or (j), as the case may be, of the Securities Act Rules. (b) No order suspending the effectiveness of the Registration Statement may be in effect and no proceedings for such purpose may be pending before or, to the knowledge of counsel to the Underwriters, threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) must be complied with or waived to the reasonable satisfaction of the Representative. (c) Since the dates as of which information is given in the Registration Statement and the Prospectus, (1) there must not have been any material change in the Common Shares or liabilities of the Fund except as set forth in or contemplated by the Prospectus; (2) there must not have been any material adverse change in the general affairs, prospects, management, business, financial condition or results of operations of the Fund or the Investment Adviser whether or not arising from transactions in the ordinary course of business as set forth in or contemplated by the Prospectus; (3) the Fund must not have sustained any material loss or interference with its business from any court or from legislative or other governmental action, order or decree, whether foreign or domestic, or from any other occurrence not described in the Registration Statement and Prospectus; and (4) there must not have occurred any event that makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or Prospectus or that is not 18 reflected in the Registration Statement or Prospectus but should be reflected therein in order to make the statements or information therein (in the case of the Prospectus, in light of the circumstances in which they were made) not misleading in any material respect; if, in the judgment of the Representative, any such development referred to in clause (1), (2), (3) or (4) of this paragraph (c) makes it impracticable or inadvisable to consummate the sale and delivery of the Shares pursuant to the Underwriting Agreement by the Underwriters, at the initial public offering price of the Shares. (d) The Representative must have received on each Closing Date a certificate, dated such date, of a President or Vice-President and the chief financial or accounting officer of each of the Fund and the Investment Adviser certifying that (1) the signers have carefully examined the Registration Statement, the Prospectus, and this Underwriting Agreement, (2) the representations of the Fund (with respect to the certificates from such Fund officers) and the representations of the Investment Adviser (with respect to the certificates from such officers of the Investment Adviser) in this Underwriting Agreement are accurate on and as of the date of the certificate, (3) there has not been any material adverse change in the general affairs, prospects, management, business, financial condition or results of operations of the Fund (with respect to the certificates from such Fund officers) or the Investment Adviser (with respect to the certificates from such officers of the Investment Adviser), which change would materially and adversely affect the ability of the Fund or the Investment Adviser, as the case may be, to fulfill its obligations under this Underwriting Agreement or the Investment Advisory Agreement, whether or not arising from transactions in the ordinary course of business, (4) with respect to the Fund only, to the knowledge of such officers after reasonable investigation, no order suspending the effectiveness of the Registration Statement, prohibiting the sale of any of the Shares or having a material adverse effect on the Fund has been issued and no proceedings for any such purpose are pending before or threatened by the Commission or any other regulatory body, whether foreign or domestic, (5) to the knowledge of the officers of the Investment Adviser, after reasonable investigation, no order having an adverse effect on the ability of the Investment Adviser to fulfill its obligations under this Underwriting Agreement or the Investment Advisory Agreement, as the case may be, has been issued and no proceedings for any such purpose are pending before or threatened by the Commission or any other regulatory body, whether foreign or domestic, and (6) each of the Fund (with respect to the certificates from such Fund officers) and the Investment Adviser (with respect to the certificates from such officers of the Investment Adviser) has performed all of its respective agreements that this Underwriting Agreement requires it to perform by such Closing Date. 19 (e) The Representative must receive on each Closing Date the opinions dated such Closing Date substantially in the form of Annexes A and B to this Underwriting Agreement from the counsel identified in each such Annex. (f) The Representative must receive on each Closing Date from Skadden, Arps, Slate, Meagher & Flom LLP or its affiliates, their counsel, an opinion dated such Closing Date with respect to the Fund, the Shares, the Registration Statement and the Prospectus, this Underwriting Agreement and the form and sufficiency of all proceedings taken in connection with the sale and delivery of the Shares. Such opinion and proceedings shall fulfill the requirements of this Section 6(f) only if such opinion and proceedings are satisfactory in all respects to the Representative. The Fund and the Investment Adviser must have furnished to such counsel such documents as counsel may reasonably request for the purpose of enabling them to render such opinion. (g) The Representative must receive on the date this Underwriting Agreement is signed and delivered by the Representative a signed letter, dated such date, substantially in the form of Annex C to this Underwriting Agreement from the firm of accountants designated in such Annex. The Representative also must receive on each Closing Date a signed letter from such accountants, dated such Closing Date, confirming on the basis of a review in accordance with the procedures set forth in their earlier letter that nothing has come to their attention during the period from a date not more than five business days before the date of this Underwriting Agreement, specified in the letter, to a date not more than five business days before such Closing Date, that would require any change in their letter referred to in the foregoing sentence. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Underwriting Agreement will comply only if they are in form and scope reasonably satisfactory to counsel for the Representative, provided that any such documents, forms of which are annexed hereto, shall be deemed satisfactory to such counsel if substantially in such form. 7. INDEMNIFICATION AND CONTRIBUTION. -------------------------------- (a) Each of the Fund and the Investment Adviser, jointly and severally, will indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of such Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act from and against any and all losses, claims, 20 liabilities, expenses and damages (including, but not limited to, any and all investigative, legal and other expenses reasonably incurred in connection with, and any and all amounts paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted), to which such Underwriter or any such person, or any of them, may become subject under the Securities Act, the Exchange Act, the Investment Company Act, the Advisers Act or other federal or state statutory law or regulation, at common law or otherwise, whether foreign or domestic, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Preliminary Prospectus, the Prospectus, the sales materials, or any amendment or supplement to the Registration Statement, the Preliminary Prospectus, the Prospectus, the sales materials or in any documents filed under the Exchange Act and deemed to be incorporated by reference into the Registration Statement, the Preliminary Prospectus, the Prospectus, or in any application or other document executed by or on behalf of the Fund or based on written information furnished by or on behalf of the Fund filed in any jurisdiction in order to qualify the Shares under the securities laws thereof or filed with the Commission, (ii) the omission or alleged omission to state, in any or all such documents, a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any act or failure to act or any alleged act or failure to act by such Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, liability, expense or damage arising out of or based upon matters covered by clause (i) or (ii) above (provided, however, that neither the Fund nor the Investment Adviser shall be liable under this clause (iii) to the extent it is finally judicially determined by a court of competent jurisdiction that such loss, claim, liability, expense or damage resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence, bad faith or willful misconduct); provided that neither the Fund nor the Investment Adviser will be liable to the extent that such losses, claims, liabilities, expenses or damages are based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Fund by the Representative on behalf of Underwriters expressly for inclusion in the Registration Statement, the Preliminary Prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that the Fund or the Investment Adviser might otherwise have. 21 (b) Each Underwriter will indemnify and hold harmless the Fund and the Investment Adviser, each person, if any, who controls the Fund or the Investment Adviser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Fund and each officer of the Fund who signs the Registration Statement to the same extent as the foregoing indemnity from the Fund or the Investment Adviser to the Underwriter, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to such Underwriter furnished in writing to the Fund by such Underwriter expressly for use in the Registration Statement, the Preliminary Prospectus or Prospectus. This indemnity will be in addition to any liability that such Underwriter might otherwise have; provided, however, that in no case shall such Underwriter be liable or responsible for any amount in excess of the fees and commissions received by the Underwriter. (c) Any party that proposes to assert the right to be indemnified under this Section 7 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 7, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission to so notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provision of this Section 7 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, disbursements and other charges of such counsel will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party 22 has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on the advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party (3) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. Subject to the requirements of Investment Company Act Release No. 11330, all such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 7 (whether or not any indemnified party is a party thereto), unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding. (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this Section 7 is applicable in accordance with its terms but for any reason is held to be unavailable from the Fund, the Investment Adviser or the Underwriters, the Fund, the Investment Adviser and the Underwriters will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Fund and the Investment Adviser from persons other than the Underwriter, such as persons who control the Fund or the Investment Adviser within the meaning of the Securities Act or the Exchange Act, officers of the Fund who signed the Registration Statement and directors of the Fund, who may also be liable for contribution) to which the Fund, the 23 Investment Adviser and the Underwriters may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Fund and the Investment Adviser on the one hand and the Underwriters on the other. The relative benefits received by the Fund and the Investment Adviser (treated jointly for this purpose as one person) on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Fund bear to the total fees and commissions received by the Underwriters. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only such relative benefits referred to in the foregoing sentence but also the relative fault of the Fund and the Investment Adviser (treated jointly for this purpose as one person) on the one hand and the Underwriters on the other hand in connection with respect to the statements or omissions or alleged statements or omissions that resulted in the losses, claims, liabilities, expenses or damages (including any investigative, legal or other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), as well as any other relevant equitable considerations appropriate in the circumstances. Such relative fault of the parties shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund, the Investment Adviser or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission and any other equitable considerations appropriate in the circumstances. The Fund, the Investment Adviser and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage , or action in respect thereof, referred to above in this Section 7(d) shall be deemed to include, for purposes of this Section 7(d) any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding any other provisions of this Section 7(d), the Underwriters shall not be required to contribute any amount in excess of the fees and commissions received by it and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not 24 guilty of such fraudulent misrepresentation. For purposes of this Section 7(d), any person who controls a party to this Agreement within the meaning of the Securities Act will have the same rights to contribution as that party, and each trustee of the Fund and each officer of the Fund who signed the Registration Statement will have the same rights to contribution as the Fund, subject in each case to the provisions hereof. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 7(d), notify such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 7(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent shall not be unreasonably withheld). (e) Notwithstanding any other provisions in this Section 7, no party shall be entitled to indemnification or contribution under this Agreement against any loss, claim, liability, expense or damage arising by reason of such person's willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder, or by reason of such person's reckless disregard of such person's obligations and duties hereunder. (f) The Fund and the Investment Adviser acknowledge that the statements with respect to stabilization on the second page of and under the caption "Underwriting" in the Preliminary Prospectus and in the Prospectus constitute the only information furnished in writing to the Fund by the Representative on behalf of the Underwriters expressly for use in such document. 8. TERMINATION. This Underwriting Agreement may be terminated by the Representative by notifying the Fund at any time: (a) before the later of the effectiveness of the Registration Statement and the time when any of the Shares are first generally offered pursuant to the Underwriting Agreement by the Representative to dealers by letter or telegram; (b) at or before any Closing Date if, in the sole judgment of the Representative, payment for and delivery of any Shares is rendered impracticable or inadvisable because (1) trading in the equity securities of the Fund is suspended by the Commission or by the principal exchange that lists the Shares, (2) additional material governmental restrictions, not in force on the date of this Underwriting Agreement, have been imposed upon trading in securities or trading has been suspended on any U.S. securities exchange, (3) a general banking moratorium has been established by U.S. federal or New York 25 authorities or (4) any outbreak or material escalation of hostilities or other calamity or crisis occurs, the effect of which is such as to make it impracticable to market any of the Shares; or (c) at or before any Closing Date, if any of the conditions specified in Section 6 have not been fulfilled when and as required by this Underwriting Agreement. 9. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters fails (other than for a reason sufficient to justify the termination of this Underwriting Agreement) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representative may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representative deems advisable, or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representative, in each case upon the terms set forth in this Underwriting Agreement. If no such arrangements have been made within 36 hours after such Closing Date, and (a) the number of Shares to be purchased by the defaulting Underwriters on such Closing Date does not exceed 10% of the Shares that the Underwriters are obligated to purchase on such Closing Date, each of the nondefaulting Underwriters will be obligated to purchase such Shares on the terms set forth in this Underwriting Agreement in proportion to their respective obligations under this Underwriting Agreement, or (b) the number of Shares to be purchased by the defaulting Underwriters on such Closing Date exceeds 10% of the Shares to be purchased by all the Underwriters on such Closing Date, the Fund will be entitled to an additional period of 24 hours within which to find one or more substitute underwriters reasonably satisfactory to the Representative to purchase such Shares on the terms set forth in this Underwriting Agreement. In any such case, either the Representative or the Fund will have the right to postpone the applicable Closing Date for not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or the Prospectus) may be effected by the Representative and the Fund. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters exceeds 10% of the Shares that the Underwriters are obligated to 26 purchase on such Closing Date, and none of the nondefaulting Underwriters or the Fund makes arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Underwriting Agreement will terminate without liability on the part of any nondefaulting Underwriter, the Fund or the Investment Adviser, except as provided in Sections 5(g) and 7 hereof. This Section will not affect the liability of any defaulting Underwriter to the Fund or the nondefaulting Underwriters arising out of such default. A substitute underwriter will become a Underwriter for all purposes of this Underwriting Agreement. 10. MISCELLANEOUS. ------------- (a) The reimbursement, indemnification and contribution agreements in Sections 5(g) and 7 hereof and the representations of the Fund, the Investment Adviser and the Underwriters in this Underwriting Agreement will remain in full force and effect regardless of any termination of this Underwriting Agreement. The reimbursement, indemnification and contribution agreements in Sections 5(g) and 7 hereof and the representations and agreements of the Fund, the Investment Adviser and the Underwriters in this Underwriting Agreement shall survive the Closing Dates and shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter, the Fund, the Investment Adviser or any controlling person and delivery of and payment for the Shares. (b) This Underwriting Agreement is for the benefit of the Underwriters, the Fund, the Investment Adviser and their successors and assigns, and, to the extent expressed in this Underwriting Agreement, for the benefit of persons controlling any of the Underwriters, the Fund, the Investment Adviser and directors and officers of the Fund and the Investment Adviser, and their respective successors and assigns, and no other person, partnership, association or corporation will acquire or have any right under or by virtue of this Underwriting Agreement. The term "successors and assigns" does not include any purchaser of the Shares from any Underwriter merely because of such purchase. (c) All notices and communications under this Underwriting Agreement will be in writing, effective only on receipt and mailed or delivered, by messenger, facsimile transmission or otherwise, to the Representative in care of PaineWebber Incorporated, Attn: Financial Institutions Group, 1285 Avenue of the Americas, New York, New York 10019, to the Fund at 1285 Avenue of the Americas, New York, New York 10019 and to the Investment Adviser at 1285 Avenue of the Americas, New York, New York 10019. 27 (d) Any action required or permitted to be taken by the Representative under this Underwriting Agreement may be taken by them jointly through PaineWebber Incorporated. (e) This Underwriting Agreement may be signed in multiple counterparts that taken as a whole constitute one agreement. (f) This Underwriting Agreement will be governed by and construed in accordance with the laws of the State of New York without reference to choice of law principles thereof. 28 Please confirm that the foregoing correctly sets forth the agreement between us. Very truly yours, Managed High Yield Plus Fund Inc. By: /s/ Thomas J. Libassi ------------------------------------ Name: Thomas J. Libassi Title: Vice President Mitchell Hutchins Asset Management Inc. By: /s/ Paul Schubert ------------------------------------ Name: Paul Schubert Title: Senior Vice President Confirmed: PaineWebber Incorporated As Representative of the Underwriters c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 By: PaineWebber Incorporated By: /s/ Oscar J. Junquera --------------------------------- Name: Oscar J. Junquera Title: Managing Director Acting on behalf of itself and the Underwriters named in Schedule 1 29 SCHEDULE 1 NAME NUMBER OF FIRM SHARES TO BE PURCHASED PaineWebber Incorporated.................... 19,150,000 ABN AMRO Chicago Corporation................ 350,000 BT Alex. Brown Incorporated................. 350,000 CIBC Oppenheimer Corp....................... 350,000 A.G. Edwards & Sons, Inc.................... 350,000 Advest, Inc................................. 175,000 Robert W. Baird & Co. Incorporated.......... 175,000 Crowell, Weedon & Co........................ 175,000 Dain Rauscher Wessels....................... 175,000 Everen Securities, Inc...................... 175,000 Fahnestock & Co. Inc........................ 175,000 First Albany Corporation.................... 175,000 Fifth Third/The Ohio Company................ 175,000 First of Michigan Corporation............... 175,000 Interstate/Johnson Lane Corporation......... 175,000 Janney Montgomery Scott Inc................. 175,000 Josephthal & Co. Inc........................ 175,000 McDonald & Company Securities, Inc.......... 175,000 Morgan Keegan & Company, Inc................ 175,000 Pacific Growth Equities, Inc................ 175,000 Parker/Hunter Incorporated.................. 175,000 Pennsylvania Merchant Group................. 175,000 Piper Jaffray Inc........................... 175,000 Ragen Mackenzie Incorporated................ 175,000 The Robinson-Humphrey Company, LLC.......... 175,000 Roney Capital Markets....................... 175,000 Stifel, Nicolaus & Company, Incorporated.... 175,000 Sutro & Co. Incorporated.................... 175,000 Tucker Anthony Incorporated................. 175,000 C.E. Unterberg, Towbin...................... 175,000 30 Wedbush Morgan Securities, Inc.............. 175,000 Allen & Company of Florida, Inc............. 100,000 George K. Baum & Company.................... 100,000 Huntleigh Securities Corporation............ 100,000 C.L. King & Associates, Inc................. 100,000 John G. Kinnard & Company, Incorporated..... 100,000 Mesirow Financial, Inc...................... 100,000 Miller, Johnson & Kuehn, Inc................ 100,000 Moors & Cabot, Inc.......................... 100,000 North Coast Securities Corporation.......... 100,000 David A. Noyes & Company.................... 100,000 Paulson Investment Company, Incorporated.... 100,000 The Seidler Companies Incorporated.......... 100,000 Southwest Securities, Inc................... 100,000 M.L. Stern & Co., Inc....................... 100,000 TD Securities (USA) Inc..................... 100,000 Torrey Pines Securities, Inc................ 100,000 ------- Total 26,700,000 ========== 31 ANNEX A FORM OF OPINION OF KIRKPATRICK & LOCKHART LLP REGARDING THE FUND 1. The Registration Statement and all post-effective amendments, if any, are effective under the Securities Act and no stop order with respect thereto has been issued and no proceeding for that purpose has been instituted or, to the best of our knowledge, is threatened by the Commission. Any filing of the Prospectus or any supplements thereto required under Rule 497 of the Securities Act Rules prior to the date hereof have been made in the manner and within the time required by such rule. 2. The Fund has been duly organized, is validly existing and in good standing as a corporation under the laws of the State of Maryland, with full power and authority to conduct all the activities conducted by it, to own or lease all assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus, and the Fund is duly licensed and qualified to do business and in good standing as a foreign corporation or otherwise in each jurisdiction in which its ownership or leasing of property or its conducting of business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the Fund, and the Fund owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus. The Fund has no subsidiaries. 3. The Common Shares of the Fund conform in all respects to the description of them in the Prospectus. All the outstanding Common Shares have been duly authorized and are validly issued, fully paid and nonassessable. The Common Shares to be issued and delivered to and paid for by the Underwriters in accordance with the Underwriting Agreement against payment therefor as provided by the Underwriting Agreement have been duly authorized and when issued and delivered to the Underwriters will have been validly issued and will be fully paid and nonassessable. No person is entitled to any preemptive or other similar rights with respect to the Common Shares. 4. The Fund is duly registered with the Commission under the Investment Company Act as a diversified, closed-end management investment company and all action under the Securities Act, the Investment Company Act, the Securities Act Rules and the Investment Company Act Rules, as the case may be, necessary to make the public offering and consummate the sale of the Common Shares as provided in the Underwriting Agreement has or will have been taken by the Fund. 5. The Fund has full power and authority to enter into each of the Underwriting Agreement, the Investment Advisory Agreement, the Custody Agreement, and the Transfer Agency Agreement (collectively, the "Fund Agreements") and to perform all of the terms and provisions thereof to be carried out by it and (A) each Fund Agreement has been duly and validly authorized, executed and delivered by the Fund, (B) each Fund Agreement does not violate in any material respect any of the applicable provisions of the Investment Company Act, the Advisers Act , the Investment Company Act Rules and the Advisers Act Rules, as the case may be, and (C) assuming due authorization, execution and delivery by the other parties thereto, each Fund Agreement constitutes the legal, valid and binding obligation of the Fund enforceable in accordance with its terms, (1) subject, as to enforcement, to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law) and (2) as rights to indemnity thereunder may be limited by federal or state securities laws. 6. None of (A) the execution and delivery by the Fund of the Fund Agreements, (B) the issue and sale by the Fund of the Common Shares as contemplated by the Underwriting Agreement and (C) the performance by the Fund of its obligations under the Fund Agreements or consummation by the Fund of the other transactions contemplated by the Fund Agreements conflicts with or will conflict with, or results or will result in a breach of, the Articles of Incorporation or the By-laws of the Fund or any agreement or instrument to which the Fund is a party or by which the Fund is bound, or any law, rule or regulation, or order of any court, governmental instrumentality, securities exchange or association or arbitrator, whether foreign or domestic, applicable to the Fund, except that we express no opinion as to the securities or "blue sky" laws applicable in connection with the purchase and distribution of the Common Shares by the Underwriters pursuant to the Underwriting Agreement. 7. The Fund is not currently in breach of, or in default under, any written agreement or instrument to which it is a party or by which it or its property is bound or affected. A-2 8. No consent, approval, authorization or order of any court or governmental agency or body or securities exchange or association is required by the Fund for the consummation by the Fund of the transactions to be performed by the Fund or the performance by the Fund of all the terms and provisions to be performed by or on behalf of it in each case as contemplated in the Fund Agreements, except such as (A) have been obtained under the Securities Act, the Investment Company Act, the Advisers Act, the Securities Act Rules, the Investment Company Act Rules and the Advisers Act Rules and (B) may be required by the New York Stock Exchange or under state securities or "blue sky" laws in connection with the purchase and distribution of the Common Shares by the Underwriters pursuant to the Underwriting Agreement. 9. The Common Shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, and the Fund's Registration Statement on Form 8-A under the 1934 Act is effective. 10. The form of the certificates for the Common Shares conform to the requirements of Maryland law. 11. There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to our knowledge, threatened against or affecting the Fund, which is required to be disclosed in the Prospectus that is not disclosed in the Prospectus, and there are no contracts, franchises or other documents that are of a character required to be described in, or that are required to be filed as exhibits to, the Registration Statement that have not been described or filed as required. 12. The Fund does not require any tax or other rulings to enable it to qualify as a regulated investment company under Subchapter M of the Code. 13. The section in the Prospectus entitled "Taxation" is a fair summary of the principal United States federal income tax rules applicable to the Fund and to the purchase, ownership and disposition of the Common Shares. 14. The Registration Statement (except the financial statements and schedules and other financial data included therein as to which we express no view), at the time it became effective, and the Prospectus (except as aforesaid), as of the date thereof, complied as to form in all material respects A-3 to the requirements of the Securities Act, the Investment Company Act and the rules and regulations of the Commission thereunder. In rendering our opinion, we have relied, as to factual matters, upon the attached written certificates and statements of officers of the Fund. In connection with the registration of the Common Shares, we have advised the Fund as to the requirements of the Securities Act, the Investment Company Act and the applicable rules and regulations of the Commission thereunder and have rendered other legal advice and assistance to the Fund in the course of its preparation of the Registration Statement, the Prospectus and sales materials. Rendering such assistance involved, among other things, discussions and inquiries concerning various legal and related subjects and reviews of certain corporate records, documents and proceedings. We also participated in conferences with representatives of the Fund and its accountants at which the contents of the Registration Statement, Prospectus, sales materials and related matters were discussed. With your permission, we have not undertaken, except as otherwise indicated herein, to determine independently, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements in the Registration Statement, Prospectus or sales materials. On the basis of the information which was developed in the course of the performance of the services referred to above, no information has come to our attention that would lead us to believe that the Registration Statement, at the time it became effective, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date and as of such Closing Date, or the sales materials, as of its date and of such Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or that any amendment or supplement to the Prospectus, as of its date, and as of such Closing Date, contained any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements in the Prospectus, in the light of the circumstances under which they were made, not misleading (except the financial statements, schedules and other financial data included therein, as to which we express no view). A-4 ANNEX B FORM OF OPINION OF VICTORIA E. SCHONEFELD REGARDING INVESTMENT ADVISER 1. The Investment Adviser has been duly organized, is validly existing and in good standing as a corporation under the laws of the State of Delaware incorporation with full power and authority to conduct all of the activities conducted by it, to own or lease all of the assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus, and the Investment Adviser is duly licensed and qualified as a foreign corporation and in good standing in each other jurisdiction in which it is required to be so qualified, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the Investment Adviser, and the Investment Adviser owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations, whether foreign or domestic, necessary for the Investment Adviser to carry on its business as contemplated in the Registration Statement and the Prospectus. 2. The Investment Adviser is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Investment Company Act, the Advisers Act Rules or the Investment Company Act Rules from acting as investment adviser for the Fund as contemplated by the Investment Advisory Agreement, the Registration Statement and the Prospectus. 3. The Investment Adviser has full power and authority to enter into each of the Underwriting Agreement and the Investment Advisory Agreement and to carry out all the terms and provisions thereof to be carried out by it, and each such agreement has been duly and validly authorized, executed and delivered by the Investment Adviser; each of the Investment Advisory Agreement and the Underwriting Agreement does not violate in any material respect any of the applicable provisions of the Investment Company Act, the Advisers Act, the Investment Company Act Rules and the Advisers Act Rules; and assuming due authorization, execution and delivery by the other parties thereto, each of the Underwriting Agreement and the Investment Advisory Agreement constitutes a legal, valid and binding obligation of the Investment Adviser, enforceable in accordance with its terms, (1) subject, as to enforcement, to applicable B-1 bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law) and (2) as rights to indemnity thereunder may be limited by federal or state securities laws. 4. Neither (A) the execution and delivery by the Investment Adviser of the Underwriting Agreement or the Investment Advisory Agreement nor (B) the consummation by the Investment Adviser of the transactions contemplated by, or the performance of its obligations under such agreements conflicts or will conflict with, or results or will result in a breach of, the Articles of Incorporation or By-Laws of the Investment Adviser or any agreement or instrument to which the Investment Adviser is a party or by which the Investment Adviser is bound, or any law, rule or regulation, or order of any court, governmental instrumentality, securities exchange or association or arbitrator, whether foreign or domestic, applicable to the Investment Adviser. 5. No consent, approval, authorization or order of any court, governmental agency or body or securities exchange or association is required for the consummation of the transactions contemplated in, or the performance by the Investment Adviser of its obligations under, the Underwriting Agreement or the Investment Advisory Agreement, as the case may be, except such as (A) have been obtained under the Investment Company Act, the Advisers Act, the Securities Act, the Investment Company Act Rules, the Advisers Act Rules and the Securities Act Rules and (B) may be required by the New York Stock Exchange or under state securities or "blue sky" laws in connection with the purchase and distribution of the Common Shares by the Underwriters pursuant to the Underwriting Agreement. 6. The description of the Investment Adviser and its business in the Registration Statement and the Prospectus complies with the requirements of the Securities Act, the Investment Company Act, the Securities Act Rules and the Investment Company Act Rules and does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. 7. There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to our knowledge, threatened against or affecting the Investment Adviser of a nature required to be disclosed in the Registration Statement or Prospectus or that might result in any material adverse change in the condition, financial or otherwise, business affairs or B-2 business prospects of the Investment Adviser or the ability of the Investment Adviser to fulfill its respective obligations under the Underwriting Agreement or under the Investment Advisory Agreement. 8. The Registration Statement (except the financial statements and schedules and other financial data included therein as to which we express no view), at the time it became effective, and the Prospectus (except as aforesaid), as of the date thereof, appeared on their face to be appropriately responsive in all material respects to the requirements of the Securities Act, the Investment Company Act and the rules and regulations of the Commission thereunder. In rendering our opinion, we have relied, as to factual matters, upon the attached written certificates and statements of officers of the Investment Adviser. In connection with the registration of the Common Shares, we have advised the Investment Adviser as to the requirements of the Securities Act, the Investment Company Act and the applicable rules and regulations of the Commission thereunder and have rendered other legal advice and assistance to the Investment Adviser in the course of the preparation of the Registration Statement, the Prospectus and the sales materials. Rendering such assistance involved, among other things, discussions and inquiries concerning various legal and related subjects and reviews of certain corporate records, documents and proceedings. We also participated in conferences with representatives of the Fund and its accountants and the Investment Adviser at which the contents of the Registration Statement, Prospectus, sales materials and related matters were discussed. With your permission, we have not undertaken, except as otherwise indicated herein, to determine independently, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements in the Registration Statement, Prospectus or sales materials. On the basis of the information which was developed in the course of the performance of the services referred to above, no information has come to our attention that would lead us to believe that the Registration Statement, at the time it became effective, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date and as of such Closing Date, or the sales materials, as of its date and as of such Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or that any amendment or supplement to the Prospectus, as of its date, and as of such Closing Date, contained any untrue statement of a material fact or omitted B-3 or omits to state a material fact necessary in order to make the statements in the Prospectus, in the light of the circumstances under which they were made, not misleading (except the financial statements, schedules and other financial data included therein, as to which we express no view). B-4 ANNEX C FORM OF ACCOUNTANT'S LETTER June _, 1998 Ladies and Gentlemen: We have audited the statement of assets, liabilities and capital of Managed High Yield Plus Fund Inc. (the "Fund") as of June _, 1998 included in the Registration Statement on Form N-2 filed by the Fund under the Securities Act of 1933 (the "Act") (File No. 333-51017) and under the Investment Company Act of 1940 (the "1940 Act") (File No. 811-08765); such statement and our report with respect to such statement are included in the Registration Statement; we are independent public accountants with respect to the Fund within the meaning of the Act and the applicable rules and regulations thereunder. 1. In our opinion, the statement of assets, liabilities and capital included in the Registration Statement and audited by us complies as to form in all respects with the applicable accounting requirements of the Act, the 1940 Act and the respective rules and regulations thereunder. 2. For purposes of this letter we have read the minutes of all meetings of the Shareholders, the Board of Directors and all Committees of the Board of Directors of the Fund as set forth in the minute books at the offices of the Fund, officials of the Fund having advised us that the minutes of all such meetings through __________ ___, 1998, were set forth therein. 3. Fund officials have advised us that no financial statements as of any date subsequent to ___________ ___, 1998, are available. We have made inquiries of certain officials of the Fund who have responsibility for financial and accounting matters regarding whether there was any change at __________ ___, 1998, in the capital shares or net assets of the Fund as compared with amounts shown in the __________ ___, 1998 statement of assets, liabilities and capital included in the Registration Statement, except for changes that the Registration C-1 Statement discloses have occurred or may occur. On the basis of our inquiries and our reading of the minutes as described in Paragraph 3, nothing came to our attention that caused us to believe that there were any such changes. The foregoing procedures do not constitute an audit made in accordance with generally accepted auditing standards. Accordingly, we make no representations as to the sufficiency of the foregoing procedures for your purposes. 4. This letter is solely for the information of the addressees and to assist the underwriters in conducting and documenting their investigation of the affairs of the Fund in connection with the offering of the securities covered by the Registration Statement, and is not to be used, circulated, quoted or otherwise referred to within or without the underwriting group for any other purpose, including but not limited to the registration, purchase or sale of securities, nor is it to be filed with or referred to in whole or in part in the Registration Statement or any other document, except that reference may be made to it in the underwriting agreement or in any list of closing documents pertaining to the offering of the securities covered by the Registration Statement. Very truly yours, ----------------------------- C-2 EX-99.7(B) 5 Exhibit No. 7(b) AMENDED AND RESTATED MASTER AGREEMENT AMONG UNDERWRITERS June 11, 1984 Paine Weber Incorporated 1285 Avenue of the Americas New York, New York 10019 Gentlemen: 1. GENERAL. We understand that PaineWebber Incorporated ("PWI") is entering into this Agreement in counterparts with us and other firms who may be underwriters for issues of securities for which PWI is acting as Representative or one of the Representatives of the several underwriters. This Agreement shall apply to any offering of securities in which we elect to act as an underwriter after receipt of a telegram, telex or other form of written communication ("Written Communication") from PWI stating the identity of the issuer and, if different from the issuer, the seller or sellers of such securities, the securities proposed to be offered, whether the underwriters are afforded an option to purchase additional securities to cover over-allotments, the price to underwriters, public offering price and date, interest rate, if any, and other variables, the amount of our proposed participation and the names of the other Representative, if any, and that our participation as an underwriter in the proposed offering shall be subject to the provisions of this Agreement. Upon our telegraphic acceptance of such Written Communication we shall become one of the underwriters of such issue for the amount specified in the Written Communication, and this Agreement shall become binding upon us and the Representatives with respect to such offering. The obligations of each underwriter shall be several and not joint. The issuer of the securities offered in any offering of securities made pursuant to this Agreement is hereinafter referred to as the "Company", and such securities are hereinafter called the "Securities". The seller or sellers of the Securities (including, if applicable, the Company) are hereinafter referred to collectively as the "Seller". All references herein to "you" or the "Representatives" shall include PWI and the other firms, if any, which are named as Representatives in the Written Communication. The Securities to be offered in any offering may but need not be registered in a shelf registration pursuant to Rule 415 under the Securities Act of 1933 (the "Securities Act"). The following provisions of this Agreement shall apply separately to each individual offering of Securities. 2. UNDERWRITING ARRANGEMENTS. The Representatives shall determine which signatories to this Agreement will be invited to become underwriters for the Securities. Changes may be made by the Representatives in those who are to be underwriters and in the respective amounts of Securities to be purchased by them, but the amount of Securities to be purchased by us as set forth in the Written Communication to us will not be changed without our consent except as provided herein or in the underwriting agreement (the "Underwriting Agreement") with the Seller covering the Securities. We authorize you on our behalf to execute and deliver the Underwriting Agreement in such form as you determine and to take such action as you deem advisable in connection with the performance of the Underwriting Agreement and this Agreement and the purchase, carrying, sale and distribution of the Securities, including the election to exercise any option to purchase additional Securities to cover over-allotments if so provided. The parties on whose behalf you execute the Underwriting Agreement are hereinafter called the "Underwriters". You may waive performance or satisfaction by the Seller of certain of its obligations or conditions included in the Underwriting Agreement, if in your judgment such waiver will not have a material adverse effect upon the interests of the Underwriters. It is understood that, if so specified in the Written Communication for the issue, arrangements may be made for the sale of Securities by the Seller pursuant to delayed delivery contracts. Such Securities are hereinafter referred to as "Delayed Delivery Securities", and such contracts as "Delayed Delivery Contracts". References herein to delayed delivery and Delayed Delivery Contracts apply only to offerings in which delayed delivery is authorized. The term "underwriting obligation", as used in this Agreement with respect to any Underwriter, shall refer to the principal amount or number of shares of the Securities which such Underwriter is obligated to purchase pursuant to the provisions of the Underwriting Agreement, without regard to any reduction in such obligation as a result of Delayed Delivery Contracts which are entered into by the Seller. As compensation for your services we will pay a management fee as specified in the Written Communication for the issue (without deduction in respect of Delayed Delivery Securities), and you may charge our account therefor. If there is more than one Representative, such compensation will be divided among the Representatives in such proportions as they determine. 3. PROSPECTUS AND REGISTRATION STATEMENT. You will furnish to us as soon as possible copies of the prospectus or supplemented prospectus to be used in connection with the offering of the Securities. As used herein with respect to an offering of Securities registered under the Securities Act, "Prospectus" means the form of prospectus (including any supplements) authorized for use in connection with such offering, and "Registration Statement" means the registration statement, as amended, filed under the Securities Act pursuant to which the Securities are registered under the Securities Act. As used herein with respect to an offering of Securities not registered under the Securities Act, "Prospectus" or "Registration Statement" means the form of final offering circular (including any supplements) authorized for use in connection with such offering and "preliminary prospectus" means any preliminary offering circular authorized for use in connection with such offering. We consent to being named in the prospectus as one of the Underwriters of the Securities. 4. PUBLIC OFFERING. (a) In connection with the public offering of the Securities, we authorize you, in your discretion (i) to determine the time of the initial public offering, to change the public offering price and the concessions and discounts to dealers after the initial public offering, to furnish the Company with the information to be included in the Registration Statement or Prospectus with respect to the terms of offering, and to determine all matters relating to advertising and communications with dealers or others; -2- (ii) to reserve for sale to dealers selected by you ("Selected Dealers") and to others, and to reserve for sale pursuant to Delayed Delivery Contracts (including Delayed Delivery Contracts arranged by you through Selected Dealers), all or any part of our Securities, which reservations for sales to others and for sales pursuant to Delayed Delivery Contracts not arranged through Selected Dealers are to be as nearly as practicable in proportion to the respective underwriting obligations of the Underwriters, unless you agree to a smaller proportion at the request of any Underwriter, and such other reservations to be in such proportions as you determine, and, from time to time, to add to the reserved Securities any Securities retained by us remaining unsold and to release to us any of our Securities reserved but not sold; (iii) to sell reserved Securities, as nearly as practicable in proportion to the respective reservations, to Selected Dealers at the public offering price less the Selected Dealers' concession and to others at the public offering price; and (iv) to buy Securities for our account from Selected Dealers at the public offering price less such amount not in excess of the Selected Dealers' concession as you determine. If, in accordance with the terms of offering set forth in the Prospectus, the offering of the Securities is not at a fixed price but at varying prices set by individual Underwriters based on market prices or at negotiated prices, the provisions of clause (i) above relating to your right to change the public offering price and concessions and discounts to dealers shall not apply, and other references in this Section and elsewhere in this Agreement to the public offering price or Selected Dealers' concession shall be deemed to mean the prices and concessions determined by you from time to time in your discretion. Sales of Securities between Underwriters may be made with your prior consent, or as you deem advisable for Blue Sky purposes. After advice from you that the Securities are released for public offering, we will offer to the public in conformity with the terms of offering set forth in the Prospectus such of our Securities as you advise us are not reserved. Any Securities sold by us (otherwise than through you) which you purchase in the open market for the account of any Underwriter will be repurchased by us on demand at a price equal to the total cost of such purchase including any taxes on redelivery, commissions, accrued interest and dividends. Securities delivered on such repurchase need not be the identical certificates so purchased. In lieu of such action you may in your discretion sell for our account the Securities so purchased and debit or credit our account for the loss or profit resulting from such sale, or charge our account with an amount not in excess of the Selected Dealers' concession with respect to such Securities. (b) We authorize you to act on our behalf in making all arrangements for the solicitation of offers to purchase Delayed Delivery Securities from the -3- Seller pursuant to Delayed Delivery Contracts and we agree that all such arrangements will be made only through you, directly or through Selected Dealers (including Underwriters acting as Selected Dealers) to whom you may pay a commission as provided in the Prospectus and herein. The obligation of each of the Underwriters to purchase and pay for Securities as set forth in the Underwriting Agreement shall be reduced in the proportion provided for therein, except that (i) as to any Delayed Delivery Contract determined by you, in your discretion, to have been directed and allocated by a purchaser to a particular Underwriter, such obligation of such Underwriters shall be reduced by the amount of Delayed Delivery Securities covered thereby, (ii) as to any Delayed Delivery Contracts for which arrangements are made through Selected Dealers, such obligation of each Underwriter shall be reduced as nearly as practicable in the proportion determined by you that the amount of Securities of such Underwriter reserved and sold pursuant to Delayed Delivery Contracts arranged through Selected Dealers bears to the total Securities so reserved and sold, and (iii) such reductions shall be rounded, as you shall determine, to the nearest $1,000 principal amount or whole share of the Securities. The fee payable to each Underwriter with respect to Delayed Delivery Securities pursuant to the Underwriting Agreement shall be credited to the account of such Underwriter based upon the amount by which such Underwriter's underwriting obligation is reduced as specified in the preceding paragraph. If the amount of Delayed Delivery Securities applied to reduce an Underwriter's underwriting obligation and the amount of Securities sold by or for the account of such Underwriter exceeds such Underwriter's underwriting obligation, there shall be credited to such Underwriter in connection with such excess amount of Securities only the amount of the Selected Dealers' concession with respect thereto. The commissions payable to Selected Dealers in respect of Delayed Delivery Contracts arranged through them shall be charged to each Underwriter in the proportion which the amount of Securities of such Underwriter reserved and sold pursuant to Delayed Delivery Contracts arranged through Selected Dealers bears to the total Securities so reserved and sold. 5. PAYMENT AND DELIVERY. We authorize you to make payment on our behalf to the Seller of the purchase price of our Securities, to take delivery of our Securities, registered as you may direct in order to facilitate deliveries, and to deliver our reserved Securities against sales. At your request we will pay you, as you direct, (i) an amount equal to the public offering price, less the selling concession, of either our Securities or our unreserved Securities or (ii) the amount set forth or indicated in the Written Communication with respect to the Securities, and such payment will be credited to our account and applied to the payment of the purchase price. After you receive payment for reserved Securities sold for our account, you will remit to us the purchase price (if any) paid by us for such Securities and credit or debit our account with the difference between the sale prices and the purchase price thereof. You will deliver to us our unreserved Securities promptly, and our reserved but unsold Securities, against payment of the purchase price therefor (except in the case of Securities for which payment has previously been made), as soon as practicable after the termination of the provisions referred to in Section 9, except that if the aggregate amount of reserved but unsold Securities upon such -4- termination does not exceed 10% of the total amount of the Securities, you may in your discretion sell such reserved but unsold Securities for the accounts of the several Underwriters as soon as practicable after such termination, at such prices and in such manner as you determine. Unless we promptly give you written instructions otherwise, if transactions in the Securities may be settled through the facilities of The Depository Trust Company, payment for and delivery of securities purchased by us will be made through such facilities, if we are a member, or if we are not a member, settlement may be made through our ordinary correspondent who is a member. 6. AUTHORITY TO BORROW. In connection with the purchase or carrying of our Securities or other securities purchased for our account, we authorize you, in your discretion, to advance your funds for our account, charging current interest rates, to arrange loans for our account, and in connection therewith to execute and deliver any notes or other instruments and hold or pledge as security any of our Securities or such other securities. Any lender may rely upon your instructions in all matters relating to any such loan. Any Securities or such other securities held by you for our account may be delivered to us for carrying purposes, and if so delivered will be redelivered to you upon demand. 7. STABILIZATION AND OVER-ALLOTMENT. We authorize you, in your discretion, to make purchases and sales of Securities, any other securities of the Company of the same class and series and any other securities of the Company which you may designate in the open market or otherwise, for long or short account, on such terms as you deem advisable, and, in arranging sales, to over-allot and cover any such over-allotment, at your discretion, by purchasing Securities, exercising the over-allotment option, if any, indicated in the Written Communication, or both. Such purchases and sales and over-allotments will be made for the accounts of the Underwriters as nearly as practicable in proportion to their respective underwriting obligations. It is understood that you may have made purchases of securities of the Company for stabilizing purposes prior to the time when we become one of the Underwriters, and we agree that any securities so purchased shall be treated as having been purchased for the respective accounts of the Underwriters pursuant to the foregoing authorization. We authorize you, in your discretion, to cover any short position incurred pursuant to this Section by purchasing securities on such terms as you deem advisable. At no time will our net commitment under the foregoing provisions of this Section exceed 15% of our underwriting obligation. Solely for purposes of the immediately preceding sentence, our "underwriting obligation" shall be deemed to exclude any Securities which we are obligated to purchase solely by virtue of the exercise of an over-allotment option. We will on demand take up at cost any securities so purchased and deliver any securities so sold or over-allotted for our account, and, if any other Underwriter defaults in its corresponding obligation, we will assume our proportionate share of such obligation without relieving the defaulting Underwriter from liability. Upon request, we will advise you of the Securities retained by us and unsold and will sell to you for the account of one or more of the Underwriters such of our unsold Securities and at such price, not less than the net price to Selected Dealers nor more than the public offering price, as you determine. 8. OPEN MARKET TRANSACTIONS. We and you agree not to bid for, purchase, attempt to induce others to purchase, or sell, directly or indirectly, any Securities, any other securities of the Company of the same class and series and any other securities of the Company which you may designate, except as brokers -5- pursuant to unsolicited orders and as otherwise provided in this Agreement. If the Securities are common stock or securities convertible into common stock, we and you also agree not to effect, or attempt to induce others to effect, directly or indirectly, any transactions in or relating to put or call options on any stock of the Company, except to the extent permitted by Rule 10b-6 under the Securities Exchange Act of 1934 (the "Exchange Act") as interpreted by the Securities and Exchange Commission. An opening uncovered writing transaction in options to acquire Securities for our account or for the account of any customer shall be deemed, for purposes of the preceding sentence, to be a transaction effected by us in or relating to put or call options on stock of the Company not permitted by Rule 10b-6. The term "opening uncovered writing transaction" means an opening sale transaction where the seller intends to become a writer of an option to purchase stock which it does not own or have the right to acquire upon exercise of conversion or option rights. 9. TERMINATION AS TO AN OFFERING. The provisions of the last two paragraphs of Section 4(a), the first sentence of Section 7, and Section 8 will terminate at the close of business on the thirtieth day after the date of the initial public offering of the Securities, unless sooner terminated as hereinafter provided. You may terminate such provision as to such offering at any time by notice to us to the effect that the offering provisions of this Agreement as to such offering are terminated. 10. EXPENSES AND SETTLEMENT. You may charge our account with any transfer taxes on sales made by you of Securities purchased by us under the Underwriting Agreement and with our proportionate shares (based upon our underwriting obligation) of all other expenses incurred by you under this Agreement or in connection with the purchase, carrying, sale or distribution of the Securities. The accounts hereunder will be settled as promptly as practicable after the termination of the provisions referred to in Section 9, but you may reserve such amount as you deem advisable for additional expenses. Your determination of the amount to be paid to or by us will be conclusive. You may at any time make partial distributions of credit balances or call for payment of debit balances. Any of our funds in your hands may be held with your general funds without accountability for interest. Notwithstanding any settlement, we will remain liable for any taxes on transfers for our account, and for our proportionate share (based upon our underwriting obligation) of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters. 11. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters hereunder or under the Underwriting Agreement will not release the other Underwriters from their obligations or affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from such default. If one or more Underwriters default under the Underwriting Agreement, you may arrange for the purchase by others, including nondefaulting Underwriters, of Securities not taken up by the defaulting Underwriter or Underwriters. 12. POSITION OF REPRESENTATIVES. You will be under no liability to us for any act or omission except for obligations expressly assumed by you herein, and no obligations on your part will be implied or inferred herefrom. Your authority hereunder and under the Underwriting Agreement may be exercised by you jointly or by PWI. The rights and liabilities of the Underwriters are several and not joint, and nothing will constitute the Underwriters a partnership, association or separate entity. -6- If for Federal income tax purposes the Underwriters should be deemed to constitute a partnership then each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1954, as amended. You, as Representatives of the several Underwriters, are authorized, in your discretion, to execute on behalf of the Underwriters such evidence of such election as may be required by the Internal Revenue Service. 13. INDEMNIFICATION. We will indemnify and hold harmless each other Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act to the extent and upon the terms upon which each Underwriter agrees to indemnify the Company and any other Seller in the Underwriting Agreement. 14. CONTRIBUTION. Each Underwriter (including you) will pay upon your request, as contribution, its proportionate share, based upon its underwriting obligation, of any losses, claims, damages or liabilities, joint or several, paid or incurred by any Underwriter to any person other than an Underwriter, arising out of or based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, any amendment or supplement thereto or any related preliminary prospectus or any other selling or advertising material approved by you for use by the Underwriters in connection with the sale of the Securities, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by an Underwriter specifically for use therein); and will pay such proportionate share of any legal or other expenses reasonably incurred by you or with your consent in connection with investigating or defending against any such loss, claim, damage or liability, or any action or proceeding (including any action or proceeding brought by a governmental or regulatory body) in respect thereof. In determining the amount of any Underwriter's obligation under this Section, appropriate adjustment may be made by you to reflect any amounts received by any one or more Underwriters in respect of such claim from the Company or any other Seller pursuant to the Underwriting Agreement or otherwise. There shall be credited against any amount paid or payable by us pursuant to this Section any loss, damage, liability or expense which is incurred by us as a result of any such claim asserted against us, and if such loss, claim, damage, liability or expense is incurred by us subsequent to any payment by us pursuant to this Section, appropriate provision shall be made to effect such credit, by refund or otherwise. If any such claim is asserted, you may take such action in connection therewith as you deem necessary or desirable, including retention of counsel for the Underwriters, and in your discretion separate counsel for any particular Underwriter or group of Underwriters, and the fees and disbursements of any counsel so retained by you shall be included in the amounts payable pursuant to this Section. In determining amounts payable pursuant to this Section, any loss, claim, damage, liability or expense incurred by any person controlling any Underwriter within the meaning of Section 15 of the Securities Act which has been incurred by reason of such control relationship shall be deemed to have been incurred by such Underwriter. Any Underwriter may elect to retain at its own expense its own counsel. You may settle or consent to the settlement of any such claim, on advice of counsel retained by you, with the approval of a majority in interest of the Underwriters. Whenever you receive notice of the assertion of any claim to which the provisions of this Section would be applicable, you will give prompt notice thereof to each Underwriter. -7- You will also furnish each Underwriter with periodic reports, at such times as you deem appropriate, as to the status of such claim and the action taken by you in connection therewith. If any Underwriter or Underwriters default in their obligation to make any payments under this Section, each nondefaulting Underwriter shall be obligated to pay its proportionate share of all defaulted payments, based upon such Underwriter's underwriting obligation as related to the underwriting obligations of all nondefaulting Underwriters. 15. REPORTS AND BLUE SKY MATTERS. We authorize you to file with the Securities and Exchange Commission and any other governmental agency any reports required in connection with any transactions effected by you for our account pursuant to this Agreement, and we will furnish any information needed for such reports. If you effect stabilizing purchases pursuant to Section 7, you will notify us promptly of the initiation and termination thereof. If stabilization is effected we will file with you, c/o PWI, not later than the fifth full business day following the termination of stabilization, any report required to be filed pursuant to Rule 17a-2 under the Exchange Act. You will not have any responsibility with respect to the right of any Underwriter or other person to sell the Securities in any jurisdiction, notwithstanding any information you may furnish in that connection. 16. REPRESENTATIONS AND AGREEMENTS. (a) You represent that you are a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"), and we represent that we are either a member in good standing of the NASD or a foreign dealer not eligible for membership. If we are such a member we agree that in making sale of the Securities we will comply with all applicable rules of the NASD, including, without limitation, the NASD's interpretation with Respect to Free-Riding and Withholding and Section 24 of Article III of the Rules of Fair Practice. If we are such a foreign dealer, we agree not to offer or sell any Securities in the United States of America except through you and in making sales of Securities outside the United States of America we agree to comply as though we were a member with such interpretation and Sections 8, 24 and 36 of Article III of the NASD's Rules of Fair Practice and to comply with Section 25 of such Article III as it applies to a nonmember broker or dealer in a foreign country. (b) We understand that it is our responsibility to examine the Registration Statement, the Prospectus, any amendment or supplement thereto relating to the offering of the Securities, any preliminary prospectus and the material, if any, incorporated by reference therein and we will familiarize ourselves with the terms of the Securities and the other terms of the offering thereof which are to be reflected in the Prospectus and the Written Communication with respect thereto. You are authorized, with the approval of counsel for the Underwriters, to approve on our behalf any amendments or supplements to the Registration Statement or the Prospectus. (c) We confirm that the information that we have given or are deemed to have given in response to the Master Underwriters' Questionnaire attached as Exhibit A hereto (which information has been furnished to the Company for use in the Registration Statement or the Prospectus) is correct. We will notify you immediately of any development before the termination of this Agreement under Section 9 as to the offering of the Securities which makes untrue or incomplete any information that we have given or are deemed to have given in response to the Master Underwriters' Questionnaire. -8- (d) Unless we have promptly notified you in writing otherwise, our name as it should appear in the Prospectus and our address are set forth on the signature page hereof. (e)(i) If the Securities are being registered under the Securities Act, we represent that we are familiar with Rule 15c2-8 under the Exchange Act relating to the distribution of preliminary and final prospectuses and agree that we will comply therewith; we agree to keep an accurate record of the distribution (including dates, number of copies and persons to whom sent) by us of copies of the Registration Statement, the Prospectus or any preliminary prospectus (or any amendment or supplement to any thereof), and promptly upon request by you, to bring all subsequent changes to the attention of anyone to whom such material shall have been distributed; and we agree to furnish to persons who receive a confirmation of sale a copy of the Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act. (ii) If the Securities will not be registered under the Securities Act, we agree that we will deliver all preliminary and final offering circulars required for compliance with the applicable laws and regulations governing the use and distribution of offering circulars by underwriters, and, to the extent consistent with such laws and regulations, we confirm that we have delivered and agree that we will deliver all preliminary and final offering circulars which would be required if the provisions of Rule 15c2-8 under the Exchange Act applied to this offering. (f) If the Securities are being registered under the Securities Act, we agree that, if we are advised by you that the Company was not, immediately prior to the filing of the Registration Statement, subject to the requirements of Section 13(a) or 15(d) of the Exchange Act, we will not, without your consent, sell any of the Securities to an account over which we exercise discretionary authority. 17. MISCELLANEOUS. (a) This Agreement may be terminated by either party hereto upon five business days' written notice to the other party; PROVIDED that with respect to any offering of Securities for which a Written Communication was sent by you and accepted by us prior to such notice, this Agreement shall remain in full force and effect as to such offering and shall terminate with respect to such offering in accordance with the provisions of Section 9. This Agreement may be supplemented or amended by you by written notice thereof to us, and any such supplement or amendment to this Agreement shall be effective with respect to any offering of securities to which this Agreement applies after the date of such supplement or amendment. Each reference to "this Agreement" herein shall, as appropriate, be to this Agreement as so amended and supplemented. (a) This Agreement and the terms and conditions set forth herein with respect to any offering of Securities together with such supplementary terms and conditions with respect to such offering as may be contained in any Written -9- Communication from you to us in connection therewith shall be governed by, and construed in accordance with, the laws of the State of New York. Very truly yours, (Name of Firm) By ----------------------- Confirmed, as of the date first above written PAINE WEBBER INCORPORATED By ----------------------- Vice President EXHIBIT A PaineWebber Incorporated MASTER UNDERWRITERS' QUESTIONNAIRE The terms used herein and not otherwise defined shall have the meanings assigned thereto in the Amended and Restated Master Agreement Among Underwriters dated June 11, 1984, between you and PaineWebber Incorporated ("PWI"). Reference will be made to this Master Underwriters' Questionnaire in each Written Communication described in Section I of the Amended and Restated Master Agreement Among Underwriters received by you from PWI in connection with offerings of securities in which PWI is acting as Representative or the manager of the Representatives of the several Underwriters. Your telegraphic acceptance of any such Written Communication should respond to this Master Underwriters' Questionnaire. Except as indicated in your telegraphic acceptance of our Written Communication with respect to the Securities: (1) neither you nor any of your directors, officers, partners or branch managers has (nor have you or they had within the last three years) a material relationship (as "material" is defined in Regulation C under the Securities Act) with the Company or its parent (if any), nor are you an affiliate of (within the meaning of the By-laws of the NASD), controlled by, controlling or under common control with the Company; (2) neither you nor any of your partners, officers, directors or branch managers, separately or as a group, owns of record or beneficially more than 5% of any class of voting securities of the Company or its parent (if any); (3) if the Securities are to be issued under an indenture to be qualified under the Trust Indenture Act of 1939; (a) neither you nor any of your directors, officers or partners is an affiliate (as defined in Rule 0-2 under the Trust Indenture Act of 1939) of the Trustee, or its parent (if any) and neither the Trustee nor its parent (if any) nor any of their directors or executive officers is a director, officer, partner, employee, appointee or representative of yours; (b) neither you nor any of your directors, partners or executive officers, separately or as a group, owns beneficially more than 1% of any class of voting securities of the Trustee or its parent (if any); and (c) if you are a corporation, you do not have outstanding nor have you assumed or guaranteed any securities otherwise than in your corporate name, and neither the Trustee nor its parent (if any) is a holder of such securities; A-1 (4) other than as is, or is to be, stated in the Registration Statement, the PWI Amended and Restated Master Agreement Among Underwriters, the PWI Amended and Restated Master Selected Dealer Agreement, or the Underwriting Agreement relating to the proposed offering, you do not know of or have reason to believe that (a) there are any discounts or commissions to be allowed or paid to underwriters or any other items that would be deemed by the NASD to constitute underwriting compensation for purposes of the NASD's Rules of Fair Practice, (b) there are any discounts or commissions to be allowed or paid to dealers, including all cash, securities, contracts, or other considerations to be received by any dealer in connection with the sale of the Securities, (c) there is an intention to over-allot or (d) the price of any security may be stabilized to facilitate the offering of the Securities; (5) your proposed commitment to purchase Securities will not result in a violation of the financial responsibility requirements of Section 15(c)(3) of the Exchange Act or the rules and regulations thereunder, including Rule 15c3-1, or any provisions of the applicable rules of the NASD or of any securities exchange to which you are subject or any restrictions imposed upon you by the NASD or any such exchange; (6) neither you nor any related person (as defined by the NASD) has (a) purchased any warrants, options or other securities of the Company within the preceding 12 months or (b) had any other dealings with the Company within the preceding 12 months as to which documents or other information is required to be furnished to the NASD, and, except as stated in the Registration Statement, you have no knowledge of any private placement of the Company's Securities within the preceding 18 months; (7) you have not prepared nor had prepared for you any report or memorandum for external use in connection with the proposed offering of the Securities, and if the Registration Statement is on Form S-1, you have not prepared any engineering, management or similar reports or memoranda relating to broad aspects of the business, operations or products of the Company within the past 12 months (except for reports solely comprised of recommendations to buy, sell or hold the securities of the Company, unless such recommendations have changed within the past six months). (If any such report or memorandum has been prepared furnish to PWI (a) four copies thereof and (b) a statement as to the actual or proposed use, identifying (i) each class of persons (institutional mailing lists, retail clients, etc.) who have received or will receive the report or memorandum, (ii) the number of copies distributed to each such class and (iii) the period of distribution.); (8) if the Written Communication states that the Company is subject to regulation under the Public Utility Holding Company Act of 1935 (the "Holding Company Act"), you are not a "holding company", or an "affiliate", or a "subsidiary company" of a "public utility company" or "holding company", each as defined in the Holding Company Act; and (9) if the Written Communication states that the Company is subject to regulation under the Holding Company Act, to the best of your knowledge, you are not a party to any proceeding being conducted by the Securities and Exchange A-2 Commission pursuant to any of the Acts administered by it, which is required to be disclosed in the Registration Statement or Prospectus or which would disqualify you from purchasing the Securities. A-3 [Letterhead of PaineWebber Incorporated] NOTICE ------ To: All persons party with PaineWebber Incorporated ("PaineWebber") to the Amended and Restated Master Agreement Among Underwriters (the "Agreement") dated June 11, 1984 Pursuant to Section 17(a) of the Agreement, PaineWebber hereby notifies you that effective as of this date, the following provisions of the Agreement are amended: (1) The fifth sentence of Section 7 is hereby amended by deleting the percentage "15%" and inserting in its place "20%" so, that as so amended, such sentence shall read in its entirety as follows: "At no time will our net commitment under the foregoing provisions of this Section exceed 20% of our underwriting obligation." (2) The first sentence of Section 9 is hereby amended by deleting the word "thirtieth" and inserting in its place the word "forty fifth" so, that as so amended, such sentence shall read in its entirety as follows: "The provisions of the last two paragraphs of Section 4(a), the first sentece of Section 7, and Section 8 will terminate at the close of business on the forty fifth day after the date of the initial public offering of the Securities, unless sooner terminated as hereinafter provided." Please acknowledge your receipt of this Notice by signing the enclosed copy of this Notice where indicated and returning it to: PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019, Attention: _____________ Very truly yours, PAINEWEBBER INCORPORATED By:_____________________ Acknowledged and Received: _________________________ [Print Name of Firm] By:______________________ Title: EX-99.7(C) 6 Exhibit No. 7(c) AMENDED AND RESTATED MASTER SELECTED DEALER AGREEMENT June 11, 1984 Paine Webber Incorporated 1285 Avenue of Americas New York, New York 10019 Gentlemen: 1. GENERAL. We understand that PaineWebber Incorporated ("PW") is entering into this Agreement with us and other firms who may be offered the right to purchase as principal a portion of securities being distributed to the public. The terms and conditions of this Agreement shall be applicable to any public offering of securities ("Securities") wherein PW (acting for its own account or for the account of any underwriting or similar group or syndicate) is responsible for managing or otherwise implementing the sale of the Securities to selected dealers ("Selected Dealers") and has expressly informed us that such terms and conditions shall be applicable. Any such offering of Securities to us as a Selected Dealer is hereinafter called an "Offering". In the case of any Offering in which you are acting for the account of any underwriting or similar group or syndicate ("Underwriters"), the terms and conditions of this Agreement shall be for the benefit of, and binding upon, such Underwriters, including, in the case of any Offering in which you are acting with others as representatives of Underwriters, such other representatives. The term "preliminary prospectus" means, in the case of an Offering registered under the Securities Act of 1933 (the "Securities Act"), any preliminary prospectus relating to an Offering of Securities or any preliminary prospectus supplement together with a prospectus relating to an Offering of Securities and, in the case of an Offering not registered under the Securities Act, any preliminary offering circular relating to an Offering of Securities or any preliminary offering circular supplement together with an offering circular relating to an Offering of Securities; the term "Prospectus" means in the case of an Offering registered under the Securities Act of 1933 (the "Securities Act"), the prospectus, together with the final prospectus supplement, if any, relating to such Offering of Securities, filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act and, in the case of an Offering not registered under the Securities Act, the final offering circular, including any supplements, relating to such Offering of Securities. 2. CONDITIONS OF OFFERING; ACCEPTANCE AND PURCHASE. Any Offering will be subject to delivery of the Securities and their acceptance by you and any other Underwriters may be subject to the approval of all legal matters by counsel and the satisfaction of other conditions, and may be made on the basis of reservation of Securities or an allotment against subscription. You will advise us by telegram, telex or other form of written communication ("Written Communication") of the particular method and supplementary terms and conditions (including, without limitation, the information as to prices and offering date referred to in Section 3(b)) of any Offering in which we are invited to participate. To the extent such supplementary terms and conditions are inconsistent with any provision herein, such terms and conditions shall supersede any such provision. Unless otherwise indicated in any such Written Communication, acceptances and other communications by us with respect to any Offering should be sent to PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019. You reserve the right to reject any acceptance in whole or in part. Payment for Securities purchased by us is to be made at such office as you may designate, at the public offering price, or, if you shall so advise us, at such price less the concession to dealers or at the price set forth or indicated in a Written Communication, on such date as you shall determine, on one day's prior notice to us, by certified or official bank check in New York Clearing House funds payable to the order of PaineWebber Incorporated, against delivery of certificates evidencing such Securities. If payment is made for Securities purchased by us at the public offering price, the concession to which we shall be entitled will be paid to us upon termination of the provisions of Section 3(b) with respect to such Securities. Unless we promptly give you written instructions otherwise, if transactions in the Securities may be settled through the facilities of The Depository Trust Company, payment for and delivery of Securities purchased by us will be made through such facilities if we are a member, or if we are not a member, settlement may be made through our ordinary correspondent who is a member. 3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. (a) PROSPECTUSES. You shall provide us with such number of copies of each preliminary prospectus, the Prospectus and any supplement thereto relating to each Offering as we may reasonably request. If the Securities will be registered under the Securities Act, we represent that we are familiar with Rule 15c2-8 under the Exchange Act relating to the distribution of preliminary and final prospectuses and agree that we will comply therewith; we agree to keep an accurate record of our distribution (including dates, number of copies and persons to whom sent) of copies of the Prospectus or any preliminary prospectus (or any amendment or supplement to any thereof), and promptly upon request by you, to bring all subsequent changes to the attention of anyone to whom such material shall have been furnished; and we agree to furnish to persons who receive a confirmation of sale a copy of the Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act. If the Securities will not be registered under the Securities Act, we agree that we will deliver all preliminary and final offering circulars required for compliance with the applicable laws and regulations governing the use and distribution of the offering circulars by underwriters, and, to the extent consistent with such laws and regulations, we confirm that we have delivered and agree that we will deliver all preliminary and final offering circulars which would be required if the provisions of Rule l5c2-8 under the Exchange Act applied to this offering. We agree that in purchasing Securities in an Offering we will rely upon no statements whatsoever, written or oral, other than the statements in the Prospectus delivered to us by you. We will not be authorized by the issuer or other seller of Securities offered pursuant to a Prospectus or by any Underwriters to give any information or to make any representation not contained in the Prospectus in connection with the sale of such Securities. (b) OFFER AND SALE OF THE PUBLIC. With respect to any Offering of Securities, you will inform us by a Written Communication of the public offering price, the selling concession, the reallowance (if any) to dealers and the time when we may commence selling Securities to the public. After such public offering has commenced, you may change the public offering price, the selling concession and the reallowance to dealers. With respect to each Offering of Securities, until the provisions of this Section 3(b) shall be terminated pursuant to Section 4, we agree to offer Securities to the public only at the -2- public offering price, except that if a reallowance is in effect, a reallowance from the public offering price not in excess of such reallowance may be allowed as consideration for services rendered in distribution to dealers who are actually engaged in the investment banking or securities business, who execute the written agreement prescribed by Section 24(c) of Article III of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD"), and who are either members in good standing of the NASD or foreign brokers or dealers not eligible for membership in the NASD who represent to us that they will promptly reoffer such Securities at the public offering price and will abide by the conditions with respect to foreign brokers and dealers set forth in Section 3(e). (c) STABILIZATION AND OVER-ALLOTMENT. You may, with respect to any Offering, be authorized to over-allot in arranging sales to Selected Dealers, to purchase and sell Securities, any other securities of the issuer of the Securities of the same class and series and any other securities of such issuer that you may designate for long or short account and to stabilize or maintain the market price of the Securities. We agree to advise you from time to time upon request, prior to the termination of the provisions of Section 3 (b) with respect to any Offering, of the amount of Securities purchased by us hereunder remaining unsold and we will, upon your request, sell to you, for the accounts of the Underwriters, such amount of Securities as you may designate, at the public offering price thereof less an amount to be determined by you not in excess of the concession to dealers. In the event that prior to the later of (i) the termination of the provisions of Section 3(b) with respect to any Offering, or (ii) the covering by you of any short position created by you in connection with such Offering for your account or the account of one or more Underwriters, you purchase or contract to purchase for the account of any of the Underwriters, in the open market or otherwise, any Securities theretofore delivered to us, you reserve the right to withhold the above-mentioned concession to dealers on such Securities if sold to us at the public offering price, or if such concession has been allowed to us through our purchase at a net price, we agree to repay such commission upon your demand, plus in each case any taxes on redelivery, commissions, accrued interest and dividends paid in connection with such purchase or contract to purchase. (d) OPEN MARKET TRANSACTIONS. We agree not to bid for, purchase, attempt to purchase, or sell, directly or indirectly, any Securities, any other securities of the issuer of the Securities of the same class and series or any other securities of such issuer as you may designate, except as brokers pursuant to unsolicited orders and as otherwise provided in this Agreement. If the Securities are common stock or securities convertible into common stock, we agree not to effect, or attempt to induce others to effect, directly or indirectly, any transactions in or relating to put or call options on any stock of such issuer, except to the extent permitted by Rule 10b-6 under the Exchange Act as interpreted by the Securities and Exchange Commission. An opening uncovered writing transaction in options to acquire Securities for our account or for the account of any customer shall be deemed, for purposes of the preceding sentence, to be a transaction effected by us in or relating to put or call options on stock of the Company not permitted by Rule 10b-6. The term "opening uncovered writing transaction" means an opening sale transaction where the seller intends to become a writer of an option to purchase stock which it does not own or have the right to acquire upon exercise of conversion or option rights. -3- (e) NASD. We represent that we are actually engaged in the investment banking or securities business and we are either a member in good standing of the NASD, or, if not such a member, a foreign dealer not eligible for membership. If we are such a member we agree that in making sales of the Securities we will comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation with Respect to Fee-Riding and Withholding and Section 24 of Article III of the Rules of Fair Practice. If we are such a foreign dealer, we agree not to offer or sell any Securities in the United States of America except through you and in making sales of Securities outside the United States of America we agree to comply as though we were a member with such Interpretation and Sections 8, 24 and 36 of Article III of the NASD's Rules of Fair Practice and to comply with Section 25 of such Article III as it applies to a nonmember broker or dealer in a foreign country. (f) RELATIONSHIP AMONG UNDERWRITERS AND SELECTED DEALERS. You may buy Securities from or sell Securities to any Underwriter or Selected Dealer and, with your consent, the Underwriters (if any) and the Selected Dealers may purchase Securities from and sell Securities to each other at the public offering price less all or any part of the concession. We are not authorized to act as agent for you or any Underwriter or the issuer or other seller of any Securities in offering Securities to the public or otherwise. Nothing contained herein or in any Written Communication from you shall constitute the Selected Dealers partners with you or any Underwriter or with one another. Neither you nor any Underwriter shall be under any obligation to us except for obligations assumed hereby or in any Written Communication from you in connection with any Offering. In connection with any Offering, we agree to pay our proportionate share of any claim, demand or liability asserted against us, and the other Selected Dealers or any of them, or against you or the Underwriters, if any, based on any claim that such Selected Dealers or any of them constitute an association, unincorporated business or other separate entity, including in each case our proportionate share of any expense incurred in defending against any such claim, demand or liability. (g) BLUE SKY LAWS. Upon application to you, you will inform us as to the jurisdictions in which you believe the Securities have been qualified for sale under the respective securities of "blue sky" laws of such jurisdictions. We understand and agree that compliance with the securities or "blue sky" laws in each jurisdiction in which we shall offer or sell any of the Securities shall be our sole responsibility and that you assume no responsibility or obligations as to the eligibility of the Securities for sale or our right to sell the Securities in any jurisdiction. (h) COMPLIANCE WITH LAW. We agree that in selling Securities pursuant to any Offering (which agreement shall also be for the benefit of the issuer or other seller of such Securities) we will comply with the applicable provisions of the Securities Act and the Exchange Act, the applicable rules and regulations of the Securities and Exchange Commission thereunder, the applicable rules and regulations of the NASD and the applicable rules and regulations of any securities exchange having jurisdiction over the Offering. You shall have full authority to take such action as you may deem advisable in respect of all matters pertaining to any Offering. Neither you nor any Underwriter shall be under any liability to us, except for lack of good faith and for obligations expressly assumed by you in this Agreement; PROVIDED, however, that nothing in this sentence shall be deemed to relieve you from any liability imposed by the Securities Act. -4- 4. TERMINATION; SUPPLEMENTS AND AMENDMENTS. This agreement may be terminated by either party hereto upon five business days' written notice to the other party; PROVIDED that with respect to any Offering for which a Written Communication was sent and accepted prior to such notice, this Agreement as it applies to such Offering shall remain in full force and effect and shall terminate with respect to such Offering in accordance with the last sentence of this Section. This Agreement may be supplemented or amended by you by written notice thereof to us, and any such supplement or amendment to this Agreement shall be effective with respect to any Offering to which this Agreement applies after the date of such supplement or amendment. Each reference to "this Agreement" herein shall, as appropriate, be to this Agreement as so amended and supplemented. The terms and conditions set forth in Sections 3(b) and (d) with regard to any Offering will terminate at the close of business on the thirtieth day after the date of the initial public offering of the Securities to which such Offering relates, but such terms and conditions, upon notice to us, may be terminated by you at any time. 5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on, and inure to the benefit of, the parties hereto and other persons specified or indicated in Section 1, and the respective successors and assigns of each of them. 6. GOVERNING LAW. This Agreement and the terms and conditions set forth herein with respect to any Offering together with such supplementary terms and conditions with respect to such Offering as may be contained in any Written Communication from you to us in connection therewith shall be governed by, and construed in accordance with, the laws of the State of New York. By signing this Agreement we confirm that our subscription to, or our acceptance of any reservation of, any Securities pursuant to an Offering shall constitute (i) acceptance of and agreement to other terms and conditions of this Agreement (as supplemented and amended pursuant to Section 4) together with and subject to any supplementary terms and conditions contained in any Written Communication from you in connection with such Offering, all of which shall constitute a binding agreement between us and you, individually or as representative of any Underwriters, (ii) confirmation that our representations and warranties set forth in Section 3 are true and correct at that time and (iii) confirmation that our agreements set forth in Sections 2 and 3 have been and will be fully performed by us to the extent and at the times required thereby. Very truly yours, (Name of Firm) By ------------------- Confirmed, as of the date first above written. PAINEWEBBER INCORPORATED. By --------------------- Vice President [Letterhead of PaineWebber Incorporated] NOTICE ------ To: All persons party with PaineWebber Incorporated ("PaineWebber") to the Amended and Restated Master Selected Dealer Agreement (the "Agreement"), dated June 11, 1984 Pursuant to Section 4 of the Agreement, PaineWebber hereby notifies you that effective as of this date, the following provision of the Agreement is amended: The fourth sentence of Section 4 is hereby amended by deleting the word "thirtieth" and inserting in its place the word "forty-fifth" so, that as so amended, such sentence shall read in its entirety as follows: "The terms and conditions set forth in Sections 3(b) and (d) with regard to any Offering will terminate at the close of business on the forty fifth day after the date of the initial public offering of the Securities to which such Offering relates, but such terms and conditions, upon notice to us, may be terminated by you at any time." Please acknowledge your receipt of this Notice by signing the enclosed copy of this Notice where indicated and returning it to: PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019, Attention: _____________ Very truly yours, PAINEWEBBER INCORPORATED By:_____________________ Acknowledged and Received: _________________________ [Print Name of Firm] By:______________________ Title: EX-99.9 7 Exhibit No. 9 CUSTODIAN CONTRACT This Contract between Managed High Yield Plus Fund Inc., a corporation organized and existing under the laws of Maryland, having its principal place of business at 1285 Avenue of the Americas, New York, New York 10019 hereinafter called the "Fund", and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian", WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT ----------------------------------------------------- The Fund hereby employs the Custodian as the custodian of its assets, including securities which it desires to be held in places within the United States ("domestic securities") and securities it desires to be held outside the United States ("foreign securities") pursuant to the provisions of the Articles of Incorporation. The Fund agrees to deliver to the Custodian all securities and cash owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian. Upon receipt of "Proper Instructions" (within the meaning of Article 4), the Custodian shall from time to time employ one or more sub-custodians located in the United States, but only in accordance with an applicable vote by the Board of Directors of the Fund, and provided that the Custodian shall have no more or less responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian so employed than any such sub-custodian has to the Custodian. The Custodian may employ as sub-custodian for the Fund's foreign securities and other assets the foreign banking institutions and foreign securities depositories designated in Schedule A hereto but only in accordance with the provisions of Article 3. For purposes of this Contract, "delivery" of domestic securities or foreign securities shall include the acquisition of a security entitlement (as that term is defined in the Massachusetts Uniform Commercial Code ("MA UCC")). 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE CUSTODIAN IN THE UNITED STATES 2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for the account of the Fund all non-cash property, to be held by it in the United States including all domestic securities owned by the Fund, other than (a) securities which are maintained pursuant to Section 2.10 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies (each, a "U.S. Securities System") and (b) commercial paper of an issuer for which State Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper System of the Custodian (the "Direct Paper System") pursuant to Section 2.11. To the extent that State Street holds Fund assets constituting "financial assets" for purposes of the MA UCC, the Custodian shall maintain those financial assets in an account established under this Contract as security entitlements in favor of the Fund. 2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver domestic securities owned by the Fund maintained by the Custodian directly or indirectly in a U.S. Securities System account of the Custodian or in the Custodian's Direct Paper book entry system account ("Direct Paper System Account") only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) Upon sale of such securities for the account of the Fund and receipt of payment therefor; 2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund; 3) In the case of a sale effected through a U.S. Securities System, in accordance with the provisions of Section 2.10 hereof; 4) To the depository agent in connection with tender or other similar offers for securities of the Fund; 5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; 6) To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee name of any sub-custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian; 7) Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any 2 loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct; 8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) For delivery in connection with any loans of securities made by the Fund, BUT ONLY against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral; 11) For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt of amounts borrowed; 12) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund; 13) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund; 14) For any other proper corporate purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer and certified by the Secretary or an Assistant Secretary, 3 specifying the securities of the Fund to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made. 2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, unless the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in "street name" or other good delivery form. If, however, the Fund directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts only to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis only of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers. 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the Custodian for the Fund may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; PROVIDED, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall be approved by vote of a majority of the Board of Directors of the Fund. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. 2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund and the Custodian, the Custodian shall, upon the receipt of Proper Instructions, make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of the Fund which are deposited into the Fund's account. 2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the Custodian shall collect on a timely basis all income and other payments with respect to domestic registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to United States bearer domestic securities 4 if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due the Fund on United States securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled. 2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of the Fund in the following cases only: 1) Upon the purchase of domestic securities, options, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or options on futures contracts to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the Investment Company Act of 1940, as amended, to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Fund or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a U.S. Securities System, in accordance with the conditions set forth in Section 2.10 hereof; (c) in the case of a purchase involving the Direct Paper System, in accordance with the conditions set forth in Section 2.11; (d) in the case of repurchase agreements entered into between the Fund and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Fund of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Fund or (e) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions as defined in Article 4; 2) In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof; 3) For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not 5 such expenses are to be in whole or part capitalized or treated as deferred expenses; 4) For the payment of any dividends declared pursuant to the governing documents of the Fund; 5) For payment of the amount of dividends received in respect of securities sold short; 6) For any other proper purpose, BUT ONLY upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made. 2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED. Except as specifically stated otherwise in this Contract, in any and every case where payment for purchase of domestic securities for the account of the Fund is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian. 2.9 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out such of the provisions of this Article 2 as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. 2.10 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The Custodian may maintain domestic securities owned by the Fund in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Exchange Act, which acts as a securities depository, or in a U.S. Securities System in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) The Custodian may maintain domestic securities of the Fund indirectly in a U.S. Securities System provided that such securities are represented in an account ("Account") of the Custodian in the U.S. Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 6 2) The records of the Custodian with respect to domestic securities of the Fund which are maintained in a U.S. Securities System shall identify by book-entry those securities belonging to the Fund; 3) The Custodian shall pay for domestic securities purchased for the account of the Fund upon (i) receipt of advice from the U.S. Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer domestic securities sold for the account of the Fund upon (i) receipt of advice from the U.S. Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the U.S. Securities System of transfers of domestic securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the U.S. Securities System for the account of the Fund; 4) The Custodian shall provide the Fund with any report obtained by the Custodian on the U.S. Securities System's accounting system, internal accounting control and procedures for safeguarding domestic securities deposited in the U.S. Securities System; 5) The Custodian shall have received the initial certificate required by Article 12 hereof; 6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from use of the U.S. Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the U.S. Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the U.S. Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any such loss or damage. 2.11 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian may maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions: 1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions; 7 2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund; 4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Fund; 5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the U.S. Securities System for the account of the Fund; 6) The Custodian shall provide the Fund with any report on its system of internal accounting control as the Fund may reasonably request from time to time. 2.12 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper corporate purposes, but only, in the case of clause (iv), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes 8 of such segregated account and declaring such purposes to be proper corporate purposes. 2.13 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of the Fund held by it and in connection with transfers of such securities. 2.14 PROXIES. The Custodian shall, with respect to the domestic securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Fund or a nominee of the Fund, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities. 2.15 COMMUNICATIONS RELATING TO FUND SECURITIES. Subject to the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of domestic securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of the domestic securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the domestic securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least three business days prior to the date on which the Custodian is to take such action. 2.16 REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including domestic securities deposited and/or maintained in a U.S. Securities System, relating to the services provided by the Custodian under this Contract; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund, to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD OUTSIDE OF THE UNITED STATES 3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby authorizes and instructs the Custodian to employ as sub-custodians for the Fund's securities and other assets maintained outside the United States the foreign banking institutions and foreign securities depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as defined in Section 4 of this Contract, 9 together with a certified resolution of the Fund's Board of Directors, the Custodian and the Fund may agree to amend Schedule A hereto from time to time to designate additional foreign banking institutions and foreign securities depositories to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct the Custodian to cease the employment of any one or more such sub-custodians for maintaining custody of the Fund's assets. 3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and other assets maintained in the custody of the foreign sub-custodians to: (a) "foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, and (b) cash and cash equivalents in such amounts as the Custodian or the Fund may determine to be reasonably necessary to effect the Fund's foreign securities transactions. The Custodian shall identify on its books as belonging to the Fund, the foreign securities of the Fund held by each foreign sub-custodian. 3.3 FOREIGN SECURITIES SYSTEMS. Except as may otherwise be agreed upon in writing by the Custodian and the Fund, assets of the Funds shall be maintained indirectly in a clearing agency which acts as a securities depository or in a book-entry system for the central handling of securities located outside of the United States (each, a "Foreign Securities System") only through arrangements implemented by the foreign banking institutions serving as sub-custodians pursuant to the terms hereof (Foreign Securities Systems and U.S. Securities Systems are collectively referred to herein as the "Securities Systems"). Where possible, such arrangements shall include entry into agreements containing the provisions set forth in Section 3.5 hereof. 3.4 HOLDING SECURITIES. The Custodian may maintain securities and other non-cash property for all of its customers, including the Fund, indirectly with a foreign sub-custodian in a single account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to securities and other non-cash property of the Fund which are maintained in such account shall identify by book-entry those securities and other non-cash property belonging to the Fund and (ii) the Custodian shall require that securities and other non-cash property so held by the Foreign Sub-custodian be held separately from any assets of the Foreign Sub-custodian or of others. 3.5 AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each agreement with a foreign banking institution shall provide that: (a) the Fund's assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors or agent, except a claim of payment for their safe custody or administration; (b) beneficial ownership of the Fund's assets will be freely transferable without the payment of money or value other than for custody or administration; (c) adequate records will be maintained identifying the assets as belonging to the Fund; (d) officers of or auditors employed by, or other representatives of the Custodian, including to the extent permitted under applicable law the independent public accountants for the Fund, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with the 10 Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be subject only to the instructions of the Custodian or its agents. 3.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon request of the Fund, the Custodian will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a foreign sub-custodian insofar as such books and records relate to the performance of such foreign banking institution under its agreement with the Custodian. 3.7 REPORTS BY CUSTODIAN. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Fund held by foreign sub-custodians, including but not limited to an identification of entities having possession of the Fund's securities and other assets and advices or notifications of any transfers of securities to or from each custodial account maintained by a foreign banking institution for the Custodian on behalf of the Fund indicating, as to securities acquired for the Fund, the identity of the entity having physical possession of such securities. 3.8 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. (a) Except as otherwise provided in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to the foreign securities of the Fund held outside the United States by foreign sub-custodians. (b) Notwithstanding any provision of this Contract to the contrary, settlement and payment for securities received for the account of the Fund and delivery of securities maintained for the account of the Fund may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. (c) Securities maintained in the custody of a foreign sub-custodian may be maintained in the name of such entity's nominee to the same extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such securities. 3.9 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which the Custodian employs a foreign banking institution as a foreign sub-custodian shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Custodian and each Fund from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a foreign banking institution as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim. 11 3.10 LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts or omissions of a foreign banking institution to the same extent as set forth with respect to sub-custodians generally in this Contract and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism or any loss where the sub-custodian has otherwise exercised reasonable care. Notwithstanding the foregoing provisions of this paragraph 3.10, in delegating custody duties to State Street London Ltd., the Custodian shall not be relieved of any responsibility to the Fund for any loss due to such delegation, except such loss as may result from (a) political risk (including, but not limited to, exchange control restrictions, confiscation, expropriation, nationalization, insurrection, civil strife or armed hostilities) or (b) other losses (excluding a bankruptcy or insolvency of State Street London Ltd. not caused by political risk) due to Acts of God, nuclear incident or other losses under circumstances where the Custodian and State Street London Ltd. have exercised reasonable care. 3.11 REIMBURSEMENT FOR ADVANCES. If the Fund requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose including but not limited to securities settlements, foreign exchange contracts and assumed settlement for the benefit of the Fund including the purchase or sale of foreign exchange or of contracts for foreign exchange, or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of such Funds assets to the extent necessary to obtain reimbursement. 3.12 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to the Fund, during the month of June, information concerning the foreign sub-custodians employed by the Custodian. Such information shall be similar in kind and scope to that furnished to the Fund in connection with the initial approval of this Contract. In addition, the Custodian will promptly inform the Fund in the event that the Custodian learns of a material adverse change in the financial condition of a foreign sub-custodian or any material loss of the assets of the Fund. 3.13 BRANCHES OF U.S. BANKS. (a) Except as otherwise set forth in this Contract, the provisions hereof shall not apply where the custody of the Funds assets are maintained in a foreign branch of a banking institution which is a "bank" as defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification set forth in Section 26(a) of said Act. The appointment of any such branch as a sub-custodian shall be governed by paragraph 1 of this Contract. 12 (b) Cash held for the Fund in the United Kingdom shall be maintained in an interest bearing account established for the Fund with the Custodian's London branch, which account shall be subject to the direction of the Custodian, State Street London Ltd. or both. 3.14 TAX LAW. The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund or the Custodian as custodian of the Fund by the tax law of the United States of America or any state or political subdivision thereof. It shall be the responsibility of the Fund to notify the Custodian of the obligations imposed on the Fund or the Custodian as custodian of the Fund by the tax law of jurisdictions other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of jurisdictions for which the Fund has provided such information. 3.15 FOREIGN EXCHANGE TRANSACTIONS. (a) Upon receipt of Proper Instructions, the Custodian shall settle foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery on behalf of and for the account of the Fund with such brokers, banks or trust companies other than the Custodian ("Currency Brokers") as the Fund may determine and direct pursuant to Proper Instructions or as the Custodian may select (Transactions Other Than As Principal"). (b) The Custodian shall not be obligated to enter into foreign exchange transactions as principal ("Transactions As Principal"). However, if the Custodian has made available to the Fund its services as a principal in foreign exchange transactions and, subject to any separate agreement between the parties relating to such transaction, the Custodian shall enter into foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery on behalf of and for the account of the Fund, with the Custodian as principal. (c) If, in a Transaction Other Than As Principal, a Currency Broker is selected by the Fund, the Custodian shall have no duty with respect to the selection of the Currency Broker, or so long as the Custodian acts as in accordance with Proper Instructions, for the failure of such Currency Broker to comply with the terms of any contract or option. If, in a Transaction Other Than As Principal, the Currency Broker is selected by the Custodian or if the Custodian enters into a Transaction As Principal, the Custodian shall be responsible for the selection of the Currency Broker and the failure of such Currency Broker to comply with the terms of any contract or option. (d) In Transactions Other Than As Principal and Transactions As Principal, the Custodian shall be responsible for any transfer of cash, the transmission of instructions to and from a Currency Broker, if any, the safekeeping of all certificates and other documents and agreements evidencing or relating to such foreign exchange transactions and the maintenance of proper records as set forth in Section 8 of this Contract. 13 4. PROPER INSTRUCTIONS Proper Instructions as used herein means a writing signed or initialed by one or more person or persons as the Board of Directors shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Fund and the Custodian agree to security procedures, including but not limited to, the security procedure selected by the Fund in the Funds Transfer Addendum attached hereto. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account in accordance with Section 2.12. 5. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY The Custodian may in its discretion, without express authority from the Fund: 1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, PROVIDED that all such payments shall be accounted for to the Fund; 2) surrender securities in temporary form for securities in definitive form; 3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and 4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Fund except as otherwise directed by the Board of Directors of the Fund. 6. EVIDENCE OF AUTHORITY The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper reasonably believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian may receive and accept a certified copy of a vote of the Board of Directors of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Directors pursuant to the Articles of Incorporation as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary. 7. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF NET ASSET VALUE AND NET INCOME 14 The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Directors of the Fund to keep the books of account of the Fund and/or compute the net asset value per share of the outstanding shares of the Fund or, if directed in writing to do so by the Fund, shall itself keep such books of account and/or compute such net asset value per share. If so directed, the Custodian shall also calculate weekly the net income of the Fund as described in the Fund's currently effective prospectus and shall advise the Fund and the Transfer Agent weekly of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the weekly income of the Fund shall be made at the time or times described from time to time in the Fund's currently effective prospectus. 8. RECORDS The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. 9. OPINION OF FUND'S INDEPENDENT ACCOUNTANT The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-2, and Form N-SAR or other annual reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission. 10. COMPENSATION OF CUSTODIAN The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian. 11. RESPONSIBILITY OF CUSTODIAN So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, 15 including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract, but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. Except as may arise from the Custodian's own negligence or willful misconduct or the negligence or willful misconduct of a sub-custodian or agent, the Custodian shall be without liability to the Fund for any loss, liability, claim or expense resulting from or caused by; (i) events or circumstances beyond the reasonable control of the Custodian or any sub-custodian or Securities System or any agent or nominee of any of the foregoing, including, without limitation, nationalization or expropriation, imposition of currency controls or restrictions, the interruption, suspension or restriction of trading on or the closure of any securities market, power or other mechanical or technological failures or interruptions, computer viruses or communications disruptions, acts of war or terrorism, riots, revolutions, work stoppages, natural disasters or other similar events or acts; (ii) errors by the Fund in its instructions to the Custodian provided such instructions have been in accordance with this Contract; (iii) the insolvency of or acts or omissions by a Securities System; (iv) any delay or failure of any broker, agent or intermediary, central bank or other commercially prevalent payment or clearing system to deliver to the Custodian's sub-custodian or agent securities purchased or in the remittance or payment made in connection with securities sold; (v) any delay or failure of any company, corporation, or other body in charge or registering or transferring securities in the name of the Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or any consequential losses arising out of such delay or failure to transfer such securities including non-receipt of bonus, dividends and rights and other accretions or benefits; (vi) delays or inability to perform its duties due to any disorder in market infrastructure with respect to any particular security or Securities System; and (vii) any provision of any present or future law or regulation or order of the United States of America, or any state thereof, or any other country, or political subdivision thereof or of any court of competent jurisdiction. The Custodian shall be liable for the acts or omissions of a foreign banking institution to the same extent as set forth with respect to sub-custodians generally in this Contract. If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it. If the Fund requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with 16 the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund assets to the extent necessary to obtain reimbursement. In no event shall the Custodian be liable for indirect, special or consequential damages. 12. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing; provided, however that the Custodian shall not act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors of the Fund has approved the initial use of a particular Securities System, as required by Rule 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.11 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors has approved the initial use of the Direct Paper System; provided further, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Articles of Incorporation, and further provided, that the Fund may at any time by action of its Board of Directors (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements. 13. SUCCESSOR CUSTODIAN If a successor custodian shall be appointed by the Board of Directors of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Directors of the Fund, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote. 17 In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Directors shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts or New York, New York, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Directors to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties and obligations of the Custodian shall remain in full force and effect. 14. INTERPRETIVE AND ADDITIONAL PROVISIONS In connection with the operation of this Contract, the Custodian and the Fund, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Contract as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Articles of Incorporation of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract. 15. MASSACHUSETTS LAW TO APPLY This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of Massachusetts. 16. PRIOR CONTRACTS This Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets. 17. REPRODUCTION OF DOCUMENTS This Contract and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto all/each agree that any such reproduction shall be admissible in evidence as the 18 original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 18. SHAREHOLDER COMMUNICATIONS ELECTION Securities and Exchange Commission Rule 14b-2 requires banks which hold securities for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, the Custodian needs the Fund to indicate whether it authorizes the Custodian to provide the Fund's name, address, and share position to requesting companies whose securities the Fund owns. If the Fund tells the Custodian "no", the Custodian will not provide this information to requesting companies. If the Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the Custodian is required by the rule to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund. For the Fund's protection, the Rule prohibits the requesting company from using the Fund's name and address for any purpose other than corporate communications. Please indicate below whether the Fund consents or objects by checking one of the alternatives below. YES [ ] The Custodian is authorized to release the Fund's name, address, and share positions. NO [ ] The Custodian is not authorized to release the Fund's name, address, and share positions. 19. LIMITATION OF LIABILITY The Custodian agrees that the Contract may only be enforced against the assets of the Fund or the particular Portfolio of the Fund. 20. DATA ACCESS SERVICES ADDENDUM The Custodian and the Fund agree to be bound by the terms of the Data Access Services Addendum attached hereto. 21. YEAR 2000. The Custodian will take reasonable steps to ensure that its products (and those of its third-party suppliers) reflect the available state of the art technology to offer products that are Year 2000-compliant, INCLUDING, but not limited to, century recognition of dates, calculations that correctly compute same-century and multi-century formulas and date values, and interface values 19 that reflect the date issues arising between now and the next one hundred years. If any changes are required, the Custodian will make the changes to its products at no cost to the Fund and in a commercially reasonable time frame and will require third-party suppliers to do likewise. 20 IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the 22nd day of June, 1998. ATTEST MANAGED HIGH YIELD PLUS FUND INC. /s/ Keith A. Weller By: /s/ Dianne E. O'Donnell - ------------------------ ------------------------------- Name: Keith A. Weller Name: Dianne E. O'Donnell Title: Vice President and Title: Vice President Assistant Secretary ATTEST STATE STREET BANK AND TRUST COMPANY /s/ Thomas M. Lenz By: /s/ Ronald E. Logue - ------------------------ ------------------------------- Thomas M. Lenz Ronald E. Logue Vice President Executive Vice President EX-99.11 8 EXHIBIT 11 KIRKPATRICK & LOCKHART LLP 1800 MASSACHUSETTS AVENUE, NW. 2ND FLOOR WASHINGTON, D.C. 20036-1800 TELEPHONE (202) 778-9000 FACSIMILE (202) 778-9100 WWW.KL.COM ROBERT A. WITTIE (202) 778-9066 RWITTIE@KL.COM January 24, 2000 Managed High Yield Plus Fund Inc. 51 West 52nd Street New York, New York 10019-6114 Ladies and Gentlemen: You have requested our opinion, as counsel to Managed High Yield Plus Fund Inc. ("Acquiring Fund"), a Maryland corporation, as to certain matters regarding the issuance of Shares of the corporation in connection with the reorganization of Managed High Yield Fund Inc. ("Acquired Fund"), a Maryland corporation, into Acquiring Fund, as provided for in the Agreement and Plan of Reorganization and Termination between Acquiring Fund and Acquired Fund ("Plan"). The Plan provides for Acquired Fund to transfer all of its assets to Acquiring Fund in exchange solely for the issuance of Shares and Acquiring Fund's assumption of the liabilities of Acquired Fund. (As used in this letter, the term "Shares" means the shares of common stock in Acquiring Fund to be issued in connection with the Plan.) As such counsel, we have examined certified or other copies, believed by us to be genuine, of the Acquiring Fund's Articles of Incorporation dated April 24, 1998, Amended and Restated Bylaws, and such other documents relating to its organization and operation as we have deemed relevant to our opinion, as set forth herein. Our opinion is limited to the laws and facts in existence on the date hereof, and it is further limited to the laws (other than the conflict of law rules) of the State of Maryland that in our experience are normally applicable to the issuance of shares of common stock by corporations and to the Securities Act of 1933, as amended ("1933 Act"), the Investment Company Act of 1940, as amended ("1940 Act") and the rules and regulations of the Securities and Exchange Commission ("SEC") thereunder. Managed High Yield Plus Fund Inc. January 24, 2000 Page 2 Based on the foregoing, we are of the opinion that the issuance of the Shares has been duly authorized by the Acquiring Fund; and that, when issued and sold in accordance with the terms contemplated by Acquiring Fund's registration statement on Form N-14 ("Registration Statement"), including receipt by Acquiring Fund of full payment for the Shares and compliance with the 1933 Act and the 1940 Act, the Shares will have been legally issued, fully paid, and non-assessable. We hereby consent to this opinion accompanying the Registration Statement when it is filed with the SEC and to the reference to our firm in the Registration Statement. Very truly yours, KIRKPATRICK & LOCKHART LLP By: /s/ Robert A. Wittie ------------------------ Robert A. Wittie EX-99.13(A) 9 Exhibit No. 13(a) TRANSFER AGENCY SERVICES AGREEMENT ---------------------------------- THIS AGREEMENT is made as of June 22, 1998 by and between PNC BANK, NATIONAL ASSOCIATION, a national banking association ("PNC"), and MANAGED HIGH YIELD PLUS FUND INC., a Maryland corporation (the "Fund"). W I T N E S S E T H: WHEREAS, the Fund is registered as a closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Fund wishes to retain PNC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund and PNC wishes to furnish such services. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS. AS USED IN THIS AGREEMENT: (A) "1933 ACT" means the Securities Act of 1933, as amended. (B) "1934 ACT" means the Securities Exchange Act of 1934, as amended. (C) "AUTHORIZED PERSON" means any officer of the Fund and any other person duly authorized by the Fund's Board of Directors to give Oral Instructions and Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PNC. An Authorized Person's scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix. (D) "CEA" means the Commodities Exchange Act, as amended. (E) "ORAL INSTRUCTIONS" mean oral instructions received by PNC from an Authorized Person. (F) "SEC" means the Securities and Exchange Commission. (G) "SECURITIES LAWS" mean the 1933 Act, the 1934 Act, the 1940 Act and the CEA. (H) "SHARES" mean the shares of common stock of the Fund. (I) "WRITTEN INSTRUCTIONS" mean written instructions signed by an Authorized Person and received by PNC. The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device. 2. APPOINTMENT. The Fund hereby appoints PNC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund in accordance with the terms set forth in this Agreement. PNC accepts such appointment and agrees to furnish such services. 3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable, will provide PNC with the following: (A) Certified or authenticated copies of the resolutions of the Fund's Board of Directors, approving the appointment of PNC or its affiliates to provide services to the Fund and approving this Agreement; (B) A copy of the Fund's Registration Statement on Form N-2 under the 1933 Act and the 1940 Act filed with the SEC; (C) A copy of the Fund's advisory agreement; (D) A copy of the Fund's underwriting agreement; (E) A copy of the Fund's administration agreement; and (F) Copies (certified or authenticated where applicable) of any and all amendments or supplements to the foregoing. 4. COMPLIANCE WITH RULES AND REGULATIONS. PNC undertakes to comply with all applicable requirements of the Securities Laws and any laws, rules and 2 regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PNC hereunder. Except as specifically set forth herein, PNC assumes no responsibility for such compliance by the Fund. 5. INSTRUCTIONS. ------------ (A) Unless otherwise provided in this Agreement, PNC shall act only upon Oral Instructions and Written Instructions. (B) PNC shall be entitled to rely upon any Oral Instructions and Written Instructions it receives from an Authorized Person pursuant to this Agreement. PNC may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or of any vote, resolution or proceeding of the Fund's Board of Directors or of the Fund's shareholders, unless and until PNC receives Written Instructions to the contrary. (C) The Fund agrees to forward to PNC Written Instructions confirming Oral Instructions so that PNC receives the Written Instructions by the close of business on the next business day after such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PNC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, PNC shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that PNC's actions comply with the other provisions of this Agreement. 3 6. RIGHT TO RECEIVE ADVICE. ----------------------- (A) ADVICE OF THE FUND. If PNC is in doubt as to any action it should or should not take, PNC may request directions or advice, including Oral Instructions or Written Instructions, from the Fund. (B) ADVICE OF COUNSEL. If PNC shall be in doubt as to any question of law pertaining to any action it should or should not take, PNC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PNC, at the option of PNC). (C) CONFLICTING ADVICE. In the event of a conflict between directions, advice or Oral Instructions or Written Instructions PNC receives from the Fund, and the advice it receives from counsel, PNC may rely upon and follow the advice of counsel. In the event PNC so relies on the advice of counsel, PNC remains liable for any action or omission on the part of PNC which constitutes willful misfeasance, bad faith, negligence or reckless disregard by PNC of any duties, obligations or responsibilities set forth in this Agreement. (D) PROTECTION OF PNC. PNC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from the Fund or from counsel and which PNC believes, in good faith, to be consistent with those directions, advice or Oral Instructions or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PNC (i) to seek such directions, advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PNC's properly taking or not taking such action. Nothing in this subsection shall excuse PNC when an action or omission on the part of PNC constitutes willful misfeasance, bad faith, negligence or reckless disregard by PNC of any duties, obligations or responsibilities set forth in this Agreement. 4 7. RECORDS; VISITS. PNC shall prepare and maintain in complete and accurate form all books and records necessary for it to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund, including (a) all those records required to be prepared and maintained by the Fund under the 1940 Act, by other applicable Securities Laws, rules and regulations and by state laws and (b) such books and records as are necessary for PNC to perform all of the services it agrees to provide in this Agreement. The books and records pertaining to the Fund, which are in the possession or under the control of PNC, shall be the property of the Fund. The Fund and Authorized Persons shall have access to such books and records in the possession or under the control of PNC at all times during PNC's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records in the possession or under the control of PNC shall be provided by PNC to the Fund or to an Authorized Person. Upon reasonable notice by the Fund, PNC shall make available during regular business hours its facilities and premises employed in connection with its performance of this Agreement for reasonable visits by the Fund, any agent or person designated by the Fund or any regulatory agency having authority over the Fund. 8. CONFIDENTIALITY. PNC agrees to keep confidential all records of the Fund and information relating to the Fund and its shareholders (past, present 5 and future), its investment adviser, PaineWebber Incorporated or any other principal underwriter for the Fund unless the release of such records or information is otherwise consented to, in writing, by the Fund prior to its release. The Fund agrees that such consent shall not be unreasonably withheld and may not be withheld where PNC may be exposed to civil or criminal contempt proceedings or when required to divulge such information or records to duly constituted authorities. 9. COOPERATION WITH ACCOUNTANTS. PNC shall cooperate with the Fund's independent public accountants and shall take all reasonable actions in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund. 10. DISASTER RECOVERY. PNC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for periodic backup of computer files and data with respect to the Fund and emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PNC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PNC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PNC's own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement and provided further that PNC has complied with this Paragraph 10. 11. COMPENSATION. As compensation for services rendered by PNC during the term of this Agreement, the Fund will pay to PNC a fee or fees as may be agreed to from time to time in writing by the Fund and PNC. 6 12. INDEMNIFICATION. --------------- (A) The Fund agrees to indemnify and hold harmless PNC and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws, and amendments thereto), and expenses, including (without limitation) reasonable attorneys' fees and disbursements, arising directly or indirectly from (i) any action or omission to act which PNC takes (a) at the request or on the direction of or in reliance on the advice of the Fund or (b) upon Oral Instructions or Written Instructions or (ii) the acceptance, processing and/or negotiation of checks or other methods utilized for the purchase of Shares. Neither PNC, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PNC's or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement. The Fund's liability to PNC for PNC's acceptance, processing and/or negotiation of checks or other methods utilized for the purchase of Shares shall be limited to the extent of the Fund's policy(es) of insurance that provide for coverage of such liability, and the Fund's insurance coverage shall take precedence. (B) PNC agrees to indemnify and hold harmless the Fund from all taxes, charges, expenses, assessment, penalties, claims and liabilities arising from PNC's obligations pursuant to this Agreement (including, without limitation, liabilities arising under the Securities Laws, and any state and foreign securities and blue sky laws, and amendments thereto) and expenses, including (without limitation) reasonable attorneys' fees and disbursements arising directly or indirectly out of PNC's or its nominee's own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement. 7 (C) In order that the indemnification provisions contained in this Paragraph 12 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise or settlement in any case in which the other party may be required to indemnify it except with the other party's prior written consent. (D) The members of the Board of the Fund, its officers and shareholders shall not be liable for any obligations of the Fund under this Agreement, and PNC agrees that in asserting any rights or claims under this Agreement, it shall look only to the assets and property of the Fund in settlement of such rights or claims and not to such members of the Board, its officers and shareholders. 13. RESPONSIBILITY OF PNC. --------------------- (A) PNC shall be under no duty to take any action on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PNC in writing. PNC shall be obligated to exercise care and diligence in the performance of its duties hereunder, to act in good faith and to use its best efforts in performing services provided for under this Agreement. PNC shall be liable for any 8 damages arising out of PNC's failure to perform its duties under this Agreement to the extent such damages arise out of PNC's willful misfeasance, bad faith, negligence or reckless disregard of such duties. (B) Without limiting the generality of the foregoing or of any other provision of this Agreement, PNC shall not be under any duty or obligation to inquire into and shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PNC reasonably believes to be genuine; or (B) subject to Section 10, delays or errors or loss of data occurring by reason of circumstances beyond PNC's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply. (C) Notwithstanding anything in this Agreement to the contrary, neither PNC nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PNC's or its affiliates' performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PNC or its affiliates. 14. INSURANCE. PNC shall maintain insurance of the types and in the amounts deemed by it to be appropriate. To the extent that policies of insurance may provide for coverage of claims for liability or indemnity by the parties set forth in this Agreement, the contracts of insurance shall take precedence, and no provision of this Agreement shall be construed to relieve an insurer of any obligation to pay claims to the Fund, PNC or other insured party which would otherwise be a covered claim in the absence of any provision of this Agreement. 9 15. SECURITY -------- (A) PNC represents and warrants that, to the best of its knowledge, the various procedures and systems which PNC has implemented with regard to the safeguarding from loss or damage attributable to fire, theft or any other cause (including provision for twenty-four hours a day restricted access) of the Fund's blank checks, certificates, records and other data and PNC's equipment, facilities and other property used in the performance of its obligations hereunder are adequate, and that it will make such changes therein from time to time as in its judgment are required for the secure performance of its obligations hereunder. PNC shall review such systems and procedures on a periodic basis, and the Fund shall have reasonable access to review these systems and procedures. (B) Y2K Compliance. PNC further represents and warrants that any and all electronic data processing systems and programs that it uses or retains in connection with the provision of services hereunder will be year 2000 compliant. 16. DESCRIPTION OF SERVICES ------------------------ (A) Services Provided on an Ongoing Basis by PNC to the Fund. (i) Establish and maintain proper shareholder registrations; (ii) Countersign certificates of stock; (iii) Provide toll-free lines for direct shareholder use, plus customer liaison staff for on-line inquiry response; (iv) Provide periodic shareholder lists, outstanding share calculations and statistics; (v) Prepare and mail required calendar and taxable year-end tax 10 and statement information (including forms 1099-DIV and 1099-B and accompanying statements); and (vi) Periodic mailing of shareholder account information and Fund financial reports. (B) SERVICES PROVIDED BY PNC UNDER ORAL OR WRITTEN INSTRUCTIONS OF THE FUND. --------------------------------------------------------------------- (i) Accept, post and perform shareholder transfers; (ii) Pay dividends and other distributions; and (iii) Issue and cancel Share certificates. (C) TRANSACTIONS NOT REQUIRING INSTRUCTIONS. In the absence of contrary Written Instructions, PNC is authorized to take the following actions: (i) TRANSFER OF SHARES; UNCERTIFICATED SECURITIES. Where a shareholder does not hold a certificate representing the number of Shares in his account and provides PNC with instructions for the transfer of such Shares which include a signature guaranteed by a national bank or registered broker/dealer and such other appropriate documentation to permit a transfer, then PNC shall register such Shares and shall deliver them pursuant to instructions received from the transferor, pursuant to the rules of the exchange upon which Shares are listed, the rules and regulations of the SEC, and the law of the State of Maryland relating to the transfer of shares of common stock. (ii) STOCK CERTIFICATES. If at any time the Fund issues stock certificates, the following provisions will apply: (a) The Fund will supply PNC with a sufficient supply of stock certificates representing Shares, in the form approved from time to time by the Board of Directors of the Fund, and, from time to time, shall replenish such supply upon request of PNC. Such stock certificates 11 shall be properly signed, manually or by facsimile signature, by the duly authorized officers of the Fund and shall bear the corporate seal or facsimile thereof of the Fund, and notwithstanding the death, resignation or removal of any officer of the Fund, such executed certificates bearing the manual or facsimile signature of such officer shall remain valid and may be issued to Shareholders until PNC is otherwise directed by Written Instructions. (b) PNC shall place a stop notice against any certificate reported to be lost or stolen and shall comply with all applicable federal regulatory requirements for reporting such loss or alleged misappropriation. In the case of the loss or destruction of any certificate representing Shares, no new certificate shall be issued in lieu thereof, unless there shall first have been furnished: (i) an appropriate bond of indemnity issued by the surety company approved by PNC and (ii) a completed release and indemnification agreement, signed by the Shareholder to protect the Fund and PNC. (c) Upon receipt of signed stock certificates, which shall be in proper form for transfer, and upon cancellation or destruction thereof, PNC shall countersign, register and issue new certificates for the same number of Shares and shall deliver them pursuant to instructions received from the transferor, the rules of the exchange 12 upon which Shares are listed, the rules and regulations of the SEC, and the law of the State of Maryland relating to the transfer of shares of common stock. (d) Upon receipt of the stock certificates, which shall be in proper form for transfer, together with the Shareholder's instructions to hold such stock certificates for safekeeping, PNC shall reduce such Shares to uncertificated status, while retaining the appropriate registration in the name of the Shareholder upon the transfer books. (e) Upon receipt of Written Instructions from a Shareholder of uncertified securities for a certificate in the number of shares in his account, PNC will issue such stock certificates and deliver them to the Shareholder. (D) TENDER AGENT SERVICES. The terms and conditions of any tender offer by the Fund to purchase its Shares shall be set forth in the form of document entitled "Offer to Purchase" and in the related form of "Letter of Transmittal," which together constitute the "Offer" and shall be forwarded to PNC by the Fund when applicable. In the event any tender offer is made, and if so requested by the Fund, PNC shall provide the following services in its capacity as a tender agent to the Fund: (i) Establish accounts with respect to the Shares at the Depository Trust Company for purposes of the Offer within two business days after the date of the Offer to Purchase. (ii) Receive all Letters of Transmittal and the accompanying stock certificates sent or delivered at the addresses set forth in the Offer. Accept a Notice of Guaranteed Delivery presented by hand, mail, telegram, telex or facsimile transmission from an 13 Eligible Institution which sets forth the name of the tendering shareholder, the number of Shares tendered, and that a Letter of Transmittal with the stock certificates will be presented as required under the Offer to Purchase; (iii) Accept provisionally those tenders evidencing some deficiency in execution. Make a reasonable attempt to inform the presenters of the need for fulfillment of requirements. Make any such tenders remaining deficient at the time of expiration available for review by the Fund on the business day immediately succeeding the Expiration Date, as defined in the Offer to Purchase, and act in accordance with the Fund's instructions regarding the disposition. (iv) Accept tenders in cases where the Shares are registered in two or more names only if signed by all named holders. (v) Accept tenders signed by persons acting in a fiduciary or representative capacity only if such capacity is shown on the Letter of Transmittal and proper evidence of their authority to act is submitted. (vi) Accept tenders from persons other than the registered shareholder provided that normal transfer requirements, including any applicable transfer taxes as set forth in the Letter of Transmittal, are fulfilled. (vii) Accept partial tenders of Shares where so indicated in the appropriate section of the Letter of Transmittal. Split up and return untendered Shares to the holder as promptly as practicable. 14 (viii) Record on a daily log the Letters of Transmittal and stock certificates and confirmations of book-entry transfer received, maintain such Letters of Transmittal and stock certificates and confirmations in a secure place, and prepare control ledgers of Letters of Transmittal and stock certificates and confirmations by item and number of Shares tendered. (ix) Review Letters of Transmittal to determine if the box captioned "Description of Shares Tendered" is filled in or completed with a preprinted label and the box captioned "Sign Here" has been executed on the first line. (x) Handle withdrawals of tendered Shares, the return of certificates for tendered Shares not accepted by the Fund, and payment for tendered Shares which the Fund has accepted, in accordance with the Fund's specific instructions given to PNC, and consistently with the terms of the Offer to Purchase and Letter of Transmittal; provided, that no payment for tendered Shares shall be required until the Fund has deposited with PNC all necessary funds (which the Fund agrees to do promptly after the Fund's acceptance of tenders as described in the Offer to Purchase). (xi) Prepare and file tax forms. (xii) Respond to inquiries from the Fund's shareholders and others in regard to the mechanics of tendering Shares (or, as appropriate, refer such inquiries to the Information Agent). (xiii) Prepare a final list of all persons whose tenders are accepted, and the number of Shares tendered. 15 (xiv) Notify the Fund with respect to any Shares received subsequent to the Expiration Date (as defined in the Offer to Purchase) and accept instructions provided on behalf of the Fund with respect to the disposition of such Shares. (E) CANCELLATION AND REISSUANCE OF SHARES. Upon receipt of appropriate notification of cancellation and reissuance, PNC shall cancel, reissue and credit the account of the investor or other recordholder with Shares in accordance with standard industry practice. (F) DIVIDENDS AND DISTRIBUTIONS. Upon receipt of a resolution of the Fund's Board of Directors authorizing the declaration and payment of dividends and distributions, PNC shall issue the dividends and distributions in cash, or, if the resolution so provides, pay such dividends and distributions in Shares. Such issuance or payment shall be made after deduction and payment of the required amount of funds to be withheld in accordance with any applicable tax laws or other laws, rules or regulations. PNC shall mail to the Fund's shareholders and the IRS and other appropriate taxing authorities such tax forms, or permissible substitute forms, and other information relating to dividends and distributions paid by the Fund (including designations of the portions of distributions of net capital gain that are 20% rate gain distributions and 28% rate gain distributions pursuant to IRS Notice 97-64) as are required to be filed and mailed by applicable law, rule or regulation within the time required thereby. PNC shall prepare, maintain and file with the IRS and other appropriate taxing authorities reports relating to all dividends above a stipulated amount paid by the Fund to its shareholders as required by tax or other laws, rules or regulations 16 Pursuant to Written Instructions, PNC may arrange for the direct payment of cash dividends and distributions to shareholders by the Fund's custodian, instead of PNC Bank disbursing such funds to the shareholder after receipt from the Fund's custodian. PNC shall maintain and file with the United States Internal Revenue Service and other appropriate taxing authorities reports relating to all dividends above a stipulated amount (currently $10.00 accumulated yearly dividends) paid by the Fund to its shareholders as required by tax or other law, rule or regulation. In accordance with the Prospectus and such procedures and controls as are mutually agreed upon from time to time by and among the Fund, PNC and the Fund's Custodian, PNC shall process applications from Shareholders relating to the Fund's Dividend Reinvestment Plan ("Dividend Reinvestment Plan") and will effect purchases of Shares in connection with and pursuant to the Dividend Reinvestment Plan. (G) COMMUNICATIONS TO SHAREHOLDERS. Upon timely Written Instructions, PNC shall mail all communications by the Fund to its shareholders, including: (i) Reports to shareholders; (ii) Confirmations of purchases and sales of fund shares; (iii) Monthly or quarterly statements; (iv) Dividend and distribution notices; (v) Proxy material; and 17 (vi) Tax form information. If requested by the Fund, PNC will prepare and certify shareholder lists in conjunction with proxy solicitations, receive and tabulate the proxy cards for the meetings of the Fund's shareholders, and supply personnel to serve as inspectors of election. (H) RECORDS. PNC shall maintain records of the accounts for each shareholder showing the following information: (i) Name, address and United States Tax Identification or Social Security number; (ii) Number and class of shares held and number and class of shares for which certificates, if any, have been issued, including certificate numbers and denominations; (iii) Historical information regarding the account of each shareholder, including dividends and distributions paid, their character (e.g. ordinary income, net capital gain (including 20% rate gain and 28% rate gain), exempt-interest, foreign tax credit and dividends received deduction eligible) for federal income tax purposes and the date and price (where applicable) for all transactions in a shareholder's account; (iv) Any stop or restraining order placed against a shareholder's account; (v) Any correspondence relating to the current maintenance of a shareholder's account; (vi) Information with respect to withholdings; and (vii) Any information required in order for the transfer agent to perform any calculations contemplated or required by this Agreement. (I) SHAREHOLDER INSPECTION OF STOCK RECORDS. Upon requests from Fund shareholders to inspect stock records, PNC will notify the Fund and require instructions granting or denying each such request. Unless PNC has acted contrary to the Fund's instructions, the Fund agrees to release PNC from any liability for refusal of permission for a particular shareholder to inspect the Fund's shareholder records. 18 (J) WITHDRAWAL OF SHARES AND CANCELLATION OF CERTIFICATES. Upon receipt of Written Instructions, PNC shall cancel outstanding certificates surrendered by the Fund to reduce the total amount of outstanding shares by the number of shares surrendered by the Fund. 17. AUTHORIZED SHARES. The Fund's authorized capital stock consists of Two Hundred Million (200,000,000) shares of Common Stock, par value $.001 per Share. PNC shall record issues of all Shares and shall notify the Fund in case any proposed issue of Shares by the Fund shall result in an over-issue as defined by Section 8-210(a) of Article 8 of the Maryland Uniform Commercial Code. In case any issue of Shares would result in such an over-issue, PNC shall refuse to issue such Shares and shall not countersign and issue certificates for such Shares. 18. DURATION AND TERMINATION. ------------------------ (A) This Agreement shall be effective on the date first above written and shall continue in effect for an initial period of two (2) years ("Initial Term"). Upon the expiration of the Initial Term, this Agreement shall automatically renew for successive terms of one (1) year ("Renewal Terms"); provided, that this Agreement may be terminated by either party during a Renewal Term upon written notice given at least ninety (90) days prior to termination. During either the Initial Term or the Renewal Terms, this Agreement may also be terminated on an earlier date by either party for cause. (B) With respect to the Fund, cause includes, but is not limited to, (i) PNC's material breach of this Agreement causing it to fail to substantially perform its duties under this Agreement. In order 19 for such material breach to constitute "cause" under this Paragraph, PNC must receive written notice from the Fund specifying the material breach and PNC shall not have corrected such breach within a 15-day period; (ii) financial difficulties of PNC evidenced by the authorization or commencement of a voluntary or involuntary bankruptcy under the U.S. Bankruptcy Code or any applicable bankruptcy or similar law, or under any applicable law of any jurisdiction relating to the liquidation or reorganization of debt, the appointment of a receiver or to the modification or alleviation of the rights of creditors; and (iii) issuance of an administrative or court order against PNC with regard to the material violation or alleged material violation of the Securities Laws or other applicable laws related to its business of performing transfer agency services; (C) With respect to PNC, cause includes, but is not limited to, the failure of the Fund to pay the compensation set forth in writing pursuant to Paragraph 11 of this Agreement. (D) Any notice of termination for cause in conformity with subparagraphs (a), (b) and (c) of this Paragraph by the Fund shall be effective thirty (30) days from the date of any such notice. Any notice of termination for cause by PNC shall be effective 90 days from the date of such notice. (E) Upon the termination hereof, the Fund shall pay to PNC such compensation as may be due for the period prior to the date of such termination. In the event that the Fund designates a successor to any of PNC's obligations under this Agreement, PNC shall, at the direction and expense of the Fund, transfer to such successor all relevant books, records and other data established or maintained by PNC hereunder including, a certified list of the shareholders of the 20 Fund with name, address, and if provided, taxpayer identification or Social Security number, and a complete record of the account of each shareholder. To the extent that PNC incurs expenses related to a transfer of responsibilities to a successor, other than expenses involved in PNC's providing the Fund's books and records described in the preceding sentence to the successors, PNC shall be entitled to be reimbursed for such extraordinary expenses, including any out-of-pocket expenses reasonably incurred by PNC in connection with the transfer. (F) Any termination effected pursuant to this Paragraph shall not affect the rights and obligations of the parties under Paragraph 12 hereof. (G) Notwithstanding the foregoing, this Agreement shall terminate with respect to the Fund upon the liquidation, merger, or other dissolution of the Fund or upon the Fund's ceasing to be a registered investment company. 19. REGISTRATION AS A TRANSFER AGENT. PNC represents that it is currently registered with the appropriate federal agency for the registration of transfer agents, or is otherwise permitted to lawfully conduct its activities without such registration and that it will remain so registered or able to so conduct such activities for the duration of this Agreement. PNC agrees that it will promptly notify the Fund in the event of any material change in its status as a registered transfer agent. Should PNC fail to be registered with the SEC as a transfer agent at any time during this Agreement, and such failure to register does not permit PNC to lawfully conduct its activities, the Fund may, on written notice to PNC, terminate this Agreement upon five days written notice to PNC. 20. NOTICES. All notices and other communications, including Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. Notices shall be addressed (a) if to PNC, c/o PFPC Inc. at 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to 21 the Fund, at the address of the Fund, Attn: President or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device during regular business hours, it shall be deemed to have been given immediately; if sent during a time other than regular business hours, such notice shall be deemed to have been given at the opening of the next business day. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered. All postage, cable, telegram, telex, and facsimile sending device charges arising from the sending of a notice hereunder shall be paid by the sender. 21. AMENDMENTS. This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought. 22. DELEGATION; ASSIGNMENT. PNC may assign its rights and delegate its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PNC gives the Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee) is qualified to act as a transfer agent and registrar with respect to securities listed on any national securities exchange on which Shares of the Fund are listed ("Exchange"); (iii) if required by the Exchange, PNC shall give notice of the delegation to the Exchange; (iv) the delegate (or assignee) agrees with PNC and the Fund to comply with all relevant provisions of the Securities Laws; and (v) PNC and such delegate (or assignee) promptly provide such information 22 as the Fund may request, and respond to such questions as the Fund may ask, relative to the delegation (or assignment), including (without limitation) the capabilities of the delegate (or assignee). The assignment and delegation of any of PNC's duties under this paragraph shall not relieve PNC of any of its responsibilities or liabilities under this Agreement. 23. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 24. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. 25. MISCELLANEOUS. ------------- (A) ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions. (B) CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (C) GOVERNING LAW. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law. 23 (D) PARTIAL INVALIDITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. (E) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. (F) FACSIMILE SIGNATURES. The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party. 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. PNC BANK, NATIONAL ASSOCIATION BY: /s/ Robert J. Perlsweig ------------------------------- Robert J. Perlsweig TITLE: Vice President ----------------------------- MANAGED HIGH YIELD PLUS FUND INC. BY: /s/ Dianne E. O'Donnell -------------------------------- TITLE: Vice President and Secretary ----------------------------- 25 AUTHORIZED PERSONS APPENDIX NAME (TYPE) SIGNATURE - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ 26 EX-99.13(B) 10 Exhibit 13(b) REVOLVING CREDIT AND SECURITY AGREEMENT among MANAGED HIGH YIELD PLUS FUND INC., as Borrower CORPORATE RECEIVABLES CORPORATION, as Lender CITIBANK, N.A., as Secondary Lender and CITICORP NORTH AMERICA, INC., as Agent Dated as of October 23, 1998 ============================================================================== [Type VII-C] TABLE OF CONTENTS ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION............................. DEFINITIONS...............................................................1 SECTION I.02. RULES OF CONSTRUCTION......................................22 SECTION I.03. COMPUTATION OF TIME PERIODS................................22 ARTICLE II ADVANCES TO THE BORROWER.........................................23 SECTION I.04. ADVANCE FACILITY...........................................23 SECTION I.05. MAKING OF ADVANCES.........................................23 SECTION I.06. ADVANCE NOTES..............................................24 SECTION I.07. MATURITY OF THE ADVANCES...................................24 SECTION I.08. PREPAYMENT OF THE ADVANCES.................................25 SECTION I.09. YIELD......................................................26 SECTION I.10. INCREASED COSTS............................................26 SECTION I.11. COMPENSATION...............................................27 SECTION I.12. ADDITIONAL YIELD ON EURODOLLAR RATE ADVANCES...............27 SECTION I.13. TERMINATION OR REDUCTION OF THE TOTAL COMMITMENT...........27 SECTION I.14. RESCISSION OR RETURN OF PAYMENT............................28 SECTION I.15. FEES PAYABLE BY BORROWER...................................28 SECTION I.16. POST DEFAULT INTEREST......................................28 SECTION I.17. PAYMENTS...................................................28 SECTION I.18. BORROWER'S OBLIGATIONS ABSOLUTE............................29 ARTICLE III CONDITIONS PRECEDENT............................................29 SECTION I.19. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT................................................................29 SECTION I.20. CONDITIONS PRECEDENT TO ALL ADVANCES.......................31 ARTICLE IV REPRESENTATIONS AND WARRANTIES...................................31 SECTION I.21. REPRESENTATIONS AND WARRANTIES OF THE BORROWER.............31 ARTICLE V COVENANTS.........................................................34 SECTION I.22. AFFIRMATIVE COVENANTS OF THE BORROWER......................34 SECTION I.23. NEGATIVE COVENANTS OF THE BORROWER.........................38 ARTICLE VI EVENTS OF DEFAULT................................................40 SECTION I.24. EVENTS OF DEFAULT..........................................40 ARTICLE VII PLEDGE OF ASSIGNED COLLATERAL; RIGHTS OF THE AGENT..............43 SECTION I.25. SECURITY INTERESTS.........................................43 SECTION I.26. SUBSTITUTION OF COLLATERAL AND RELEASE OF SECURITY INTEREST.................................................................44 SECTION I.27. APPLICATION OF PROCEEDS....................................45 SECTION I.28. RIGHTS AND REMEDIES UPON EVENT OF DEFAULT..................46 SECTION I.29. REMEDIES CUMULATIVE........................................46 SECTION I.30. ENFORCEMENT OF REMEDIES UNDER THE CUSTODIAL AGREEMENT......47 ARTICLE VIII THE AGENT......................................................47 SECTION I.31. AUTHORIZATION AND ACTION...................................47 SECTION I.32. AGENT'S RELIANCE, ETC......................................47 ARTICLE IX MISCELLANEOUS....................................................48 SECTION I.33. NO WAIVER; MODIFICATIONS IN WRITING........................48 SECTION I.34. NOTICES, ETC...............................................48 SECTION I.35. TAXES......................................................50 SECTION I.36. COSTS AND EXPENSES; INDEMNIFICATION........................51 SECTION I.37. EXECUTION IN COUNTERPARTS..................................52 SECTION I.38. ASSIGNABILITY..............................................52 SECTION I.39. GOVERNING LAW..............................................53 2 SECTION I.40. SEVERABILITY OF PROVISIONS.................................53 SECTION I.41. CONFIDENTIALITY............................................53 SECTION I.42. MERGER.....................................................55 SECTION I.43. NO PROCEEDINGS.............................................55 SECTION I.44. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................55 SECTION I.45. SUBMISSION TO JURISDICTION; WAIVERS........................55 SECTION I.46. WAIVER OF JURY TRIAL.......................................56 SCHEDULES Schedule I Form of Investor Report Schedule II Form of Weekly Portfolio Report Schedule III List of Approved Assets EXHIBITS EXHIBIT A Form of Advance Note EXHIBIT B Form of Notice of Borrowing EXHIBIT C Form of Assignment and Acceptance REVOLVING CREDIT AND SECURITY AGREEMENT REVOLVING CREDIT AND SECURITY AGREEMENT, dated as of October 23, 1998 among CORPORATE RECEIVABLES CORPORATION, CITIBANK, N.A. and the other Secondary Lenders (as hereinafter defined) from time to time parties hereto, CITICORP NORTH AMERICA, INC., as agent for the Lender (as hereinafter defined) and the Secondary Lenders (in such capacity, together with its successors and assigns, the "Agent") and MANAGED HIGH YIELD PLUS FUND INC. (together with its permitted successors and assigns, the "Borrower"). W I T N E S S E T H: WHEREAS, the Borrower desires that the Lender and the Secondary Lenders from time to time make advances to the Borrower on the terms and subject to the conditions set forth in this Agreement; WHEREAS, the Lender and the Secondary Lenders are willing to make such advances to the Borrower for such purposes on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION DEFINITIONS. As used in this Agreement, the following terms shall have the meanings indicated: "ADVANCE" shall mean each borrowing by the Borrower pursuant to Article II. "ADVANCE NOTE" shall mean each promissory note issued by the Borrower to the Lender and each Secondary Lender evidencing the Advances made to the Borrower by the Lender and each Secondary Lender, substantially in the form of Exhibit A hereto, as the same may from time to time be amended, supplemented, waived or modified. "ADVERSE CLAIM" means any Lien or other right, claim, or encumbrance in, of or on any Person's assets or properties in favor of any other Person, other than any such Lien, right, claim or encumbrance of any Secured Party created by or pursuant to this Agreement. "ADVISER" means Mitchell Hutchins Asset Management Inc., together with its permitted successors and assigns. "ADVISORY AGREEMENT" means the Investment Advisory and Administration Contract dated as of June 22, 1998 between the Adviser and the Borrower, as the same may be amended, supplemented, waived or modified as permitted under the Program Documents. "AFFILIATE" shall mean, in respect of a referenced Person (a) another Person controlling, controlled by or under common control with such referenced Person (which in the case of Corporate Receivables Corporation and the Agent, shall also include any Person who has a relationship to the Agent comparable to that of Corporate Receivables Corporation) or (b) any officer (exclusive of a "ministerial officer" with no authority to bind a Person), director of or partner in the referenced Person. The terms "control," "controlling," "controlled" and the like shall mean the direct or indirect possession of the power to direct or cause the direction of the management or policies of a Person or the disposition of its assets or properties, whether through ownership, by contract, arrangement or understanding, or otherwise. "AGENT" shall have the meaning assigned to such term in the introduction to this Agreement. "AGENT'S ACCOUNT" means the special account (account number 40517805, ABA No. 021000089) of the Agent maintained at the office of Citibank at its Principal Office or to such other account as the Agent shall designate in writing to the Borrower. "AGGREGATE CUSTODIAN'S ADVANCE AMOUNT" shall mean the sum of (i) the aggregate unpaid Dollar amount of all Custodian's Overdraft Advances of cash, (ii) the aggregate Asset Value of all Custodian's Overdraft Advances of securities to the extent not reimbursed by the Borrower, and (iii) the accrued and unpaid interest, if any, on the amounts set forth above. "AGREEMENT" shall mean this Agreement, as the same may from time to time be amended, supplemented, waived or modified. "ALTERNATE BASE RATE" means a fluctuating interest rate per annum as shall be in effect from time to time, which rate shall be at all times equal to the highest of: (a) the Base Rate; (b) one-half of one percent above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding 2 Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, in either case adjusted to the nearest 1/16 of one percent or, if there is no nearest 1/16 of one percent, to the next higher 1/16 of one percent; and (c) one half of one percent per annum above the Federal Funds Rate. "APPLICABLE LAW" shall mean any Law of any Authority, including, without limitation, all Federal and state banking or securities laws, to which the Person in question is subject or by which it or any of its property is bound. "APPLICABLE MARGIN" means, with respect to the Eurodollar Rate, .50% per annum; PROVIDED, HOWEVER, that during the continuance of any Event of Default the "Applicable Margin" shall be 1.50% per annum. "APPROVED ASSETS" shall mean the Assets specified on Schedule III hereto, as supplemented or amended upon the agreement of the Agent and the Borrower. "ASSET PURCHASE AGREEMENT" means the Asset Purchase Agreement entered into by a Secondary Lender (other than Citibank) concurrently with the Assignment and Acceptance pursuant to which it became party to this Agreement. "ASSET VALUE" shall mean, as of any day of determination (a) in respect of Cash, the amount of such Cash, and (b) in respect of any other Asset, the Value of such Asset computed in the manner as such Value is required to be computed by the Borrower in accordance with the Prospectus of the Borrower and in accordance with Applicable Law, including without limitation the rules, regulations and interpretations of the SEC under the Investment Company Act; PROVIDED, that the Asset Value of any Asset shall be net of all of the Borrower's obligations to pay any unpaid portion of the purchase price thereof. "ASSETS" means a collective reference to all items which would be classified as an "asset" on the balance sheet of the Borrower in accordance with GAAP. "ASSIGNED COLLATERAL" shall have the meaning assigned to such term in Section 7.01. "ASSIGNEE RATE" means in respect of any Advance for any Settlement Period an interest rate per annum equal to the Applicable Margin above the Eurodollar Rate for such Settlement Period; PROVIDED, HOWEVER, that in case of: 3 (i) any Settlement Period on or prior to the first day of which a Secondary Lender or Lender (other than CRC) shall have notified the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Secondary Lender or Lender to fund such Advance at the Assignee Rate set forth above (and such Secondary Lender or Lender shall not have subsequently notified the Agent that such circumstances no longer exist), (ii) any Settlement Period of one to (and including) 27 days, (iii) any Settlement Period as to which the Agent does not receive notice, by no later than 12:00 noon (New York City time) on the third Business Day preceding the first day of such Settlement Period, that such Advances will not be funded by issuance of commercial paper, or (iv) any Settlement Period for which the aggregate principal amount of the outstanding Advances is less than $500,000, the "Assignee Rate" for such Settlement Period shall be an interest rate per annum equal to the Alternate Base Rate in effect on the first day of such Settlement Period; PROVIDED, HOWEVER, that for any Advance for which Yield will be calculated by reference to the Assignee Rate for any Settlement Period, the "Assignee Rate" for such Settlement Period shall be an interest rate per annum equal to the Alternate Base Rate in effect on the first day of such Settlement Period if the Agent receives a written request from the Borrower prior to the third Business Day preceding the first day of such Settlement Period that the Assignee Rate be determined by reference to the Alternate Base Rate. "ASSIGNMENT AND ACCEPTANCE" means the Assignment and Acceptance, in substantially the form of Exhibit C hereto, entered into by a Secondary Lender, an Eligible Assignee and the Agent, pursuant to which such Eligible Assignee may become a party to this Agreement. "AUTHORITY" shall mean any governmental or quasi-governmental authority, whether executive, legislative, judicial, administrative or other, or any combination thereof, including, without limitation, any Federal, state, territorial, county, municipal or other government or governmental or quasi-governmental agency, arbitrator, board, body, branch, bureau, commission, corporation, court, department, instrumentality, master, mediator, panel, referee, system or other political unit or subdivision or other entity of any of the foregoing, whether domestic or foreign. "BASE RATE" shall mean the rate of interest from time to time announced publicly by Citibank at its Principal Office as its base rate. The 4 Base Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer of Citibank. "BENEFIT ARRANGEMENT" shall mean at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "BORROWER" shall have the meaning assigned to such term in the introduction to this Agreement. "BORROWER OBLIGATIONS" shall mean the payment of all indebtedness, whether absolute, fixed or contingent, at any time or from time to time owing by the Borrower to any Secured Party under or in connection with this Agreement, the Advance Notes, the Asset Purchase Agreement or any other Program Document, including without limitation, all amounts payable by the Borrower in respect of the Advances, with interest thereon, and the amounts payable under Sections 2.06, 2.07, 2.08, 2.09, 2.11, 2.12, 2.13, 7.04(b), 9.03 and 9.04 of this Agreement. "BORROWER'S ACCOUNT" shall mean Account No. 5217-060-2 and ABA No. 011000028 maintained with State Street Bank and Trust Company, or such other account as the Borrower shall designate in writing to the Agent. "BORROWING BASE" shall mean on the date any determination thereof is made, an amount equal to the aggregate Asset Value of all Eligible Collateral reduced by the aggregate Asset Value of all Eligible Collateral in which the Agent does not have a valid and perfected first priority security interest free and clear of Adverse Claims. "BORROWING BASE TEST" shall mean as of any date of determination that the Borrowing Base shall be at least equal to the product of (i) Credits Outstanding and (ii) 2.5. "BORROWING DATE" shall have the meaning assigned to such term in Section 2.02. "BUSINESS DAY" shall mean any day on which (i) banks are not authorized or required to close in New York City, and (ii) if this definition of "Business Day" is utilized in connection with a Eurodollar Advance, dealings are carried out in the London interbank market. "CASH" shall mean a demand deposit of United States currency immediately available on the day in question in an account maintained by the Custodian. "CITIBANK" shall mean Citibank, N.A. 5 "CLOSING DATE" shall mean the first date on which the conditions precedent specified in Article III shall have been fully satisfied. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL ACCOUNT" shall have the meaning assigned to such term in the Control Agreement. "CONTROL AGREEMENT" means the Control Agreement, dated as of the date hereof among the Borrower, the Agent and the Custodian, as the same may from time to time be amended, supplemented, waived or modified. "COMMITTED ADVANCE" shall have the meaning assigned to such term in Section 2.02(b). "CRC" shall mean Corporate Receivables Corporation together with its successors and assigns that constitute special purpose entities that issue commercial paper notes or other debt securities. "CREDITS OUTSTANDING" shall mean at any time a determination thereof is made, an amount equal to (i) the outstanding principal amount of all Advances, and (ii) the unpaid Yield accrued and to accrue on the outstanding Advances until the last day of the next succeeding calendar month for such Advances computed by reference to the Assignee Rate for a thirty (30) day period in effect as of the time of determination. "CUSTODIAN" shall mean State Street Bank and Trust Company, as custodian and securities intermediary under the Custodial Agreement and the Control Agreement, together with its permitted successors and assigns. "CUSTODIAN'S OVERDRAFT ADVANCES" shall mean any advance of cash or securities by the Custodian pursuant to the Custodial Agreement. "CUSTODIAL AGREEMENT" shall mean the Custodian Contract dated as of June 22, 1998 between the Borrower and the Custodian, as the same may from time to time be amended, supplemented, waived or modified as permitted under the Program Documents. "DEBT" shall mean with respect to any Person, at any date, without duplication, (i) all obligations of such Person for borrowed money, including without limitation, reimbursement obligations relating to letters of credit, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, (iv) all obligations of such Person as lessee which are capitalized in accordance with GAAP, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt 6 is assumed by such Person, (vi) payment obligations, fixed or contingent, under investment, financial derivative or similar contracts (other than covered short sales); (vii) all Debt of others Guaranteed by such Person, and (viii) to the extent not otherwise included, all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of such Person's balance sheet. "DEFAULT" shall mean any event which, with the passage of time, the giving of notice, or both, would constitute an Event of Default. "DERIVATIVES TRANSACTION" shall mean any financial futures contract, exchange traded or OTC option, forward currency contract, swap, swaption, collar, floor, cap and other agreement of a similar nature. "DISTRESSED ASSET" means any Asset (i) which is the subject of a bankruptcy, insolvency, liquidation or other similar proceedings or in the case of any Loan Asset the related Obligor is the subject of any such proceeding, (ii) which is to the actual knowledge of the Adviser or the Borrower, in default as to payment of principal or interest or otherwise under the instruments or agreements under which they were issued or in the case of any Loan Asset under the applicable Loan Documents, (iii) if such Asset is a Loan Asset (x) in respect of which there is a breach of a material provision of the related Loan Documents or a "default" or "event of default" has occurred and is continuing under the Related Loan Documents, or (y) which is otherwise classified by the Borrower as "non-performing" pursuant to GAAP, or (iv) which is rated lower than "Caa3" by Moody's or lower than "CCC-" by S&P or which, if unrated, are in the reasonable judgment of the Adviser of equivalent credit quality. "DOLLARS" and "$" mean lawful money of the United States of America. "ELIGIBLE ASSET" shall mean any Asset which the Borrower is permitted to purchase in accordance with the Investment Policies and Restrictions which the Borrower owns free and clear of all Adverse Claims (other than Permitted Liens); PROVIDED, that such Asset: (i) does not constitute a Derivatives Transaction, Illiquid Asset or an Asset which is the subject of a Derivatives Transaction, reverse repurchase agreement, dollar roll or a securities lending transaction; (ii) if it is a Loan Asset, such Asset constitutes an Eligible Loan Asset which is not a subparticipation; and (iii) if it is not an Approved Asset, is not of a type that the Agent reasonably determines upon at least five (5) Business Days' prior written notice to the Borrower is no longer acceptable to be included as an Eligible Asset. 7 "ELIGIBLE ASSIGNEE" means Citicorp North America, Inc., Citibank, any of their respective Affiliates, any Person managed by Citibank, Citicorp North America, Inc. or any of their respective Affiliates, or any financial or other institution acceptable to the Agent. "ELIGIBLE COLLATERAL" shall mean at any time the Assigned Collateral (a) which constitutes Eligible Assets, and (b) which does not constitute a repurchase agreement or a Loan Asset. "ELIGIBLE LOAN ASSET" at any time means a Loan Asset: (i) which is a syndicated term loan under which the interest payable on the principal amount thereof by the related Obligor is payable in cash and which is part of a senior credit facility with an aggregate outstanding principal amount of all loans under such facility on the Origination Date of such Loan Asset of at least $25,000,000; (ii) under which (A) if the Transaction Agent is a bank, the current deposit rating of the Transaction Agent or its controlling Affiliate is no less than "A-" from S&P and "A3" from Moody's, and (B) if the Transaction Agent is not a bank, the medium and long term corporate debt obligations of such Transaction Agent are rated no less than "A-" from S&P and "A3" from Moody's; (iii) which relates to Loan Documents in which the Borrower's interest (direct or participating) in the aggregate outstanding principal amount of all loans thereunder is no greater than 33-1/3%; (iv) which is not subordinated (pursuant to contractual provisions or otherwise) to the prior payment of any other liabilities or any equity interests of the related Obligor; (v) which has a scheduled final maturity date no later than the tenth (10th) anniversary after the related Origination Date; (vi) which is not a revolving loan or any other type of instrument, the Loan Documents for which provide that the Borrower has a continuing obligation to advance any amount or otherwise extend credit to the Obligor after the date the Borrower funded its interest in such Loan Asset; (vii) if it is a Distressed Asset, the underlying loans are fully collateralized by a first priority perfected security interest in assets or properties of the related Obligor; (viii) in which, to the best of the Borrower's knowledge, the Borrower's interest in all collateral security therefor and principal and interest payments thereunder is no less than pro rata and pari passu with all other lenders thereunder and participants therein; 8 (ix) which, if the Borrower is a participant therein, was purchased from a selling institution which is either (A) a bank (or a Section 20 Affiliate of a controlling parent bank), which bank has a current deposit rating no less than "A-" from S&P and "A3" from Moody's, or (B) not a bank, and the medium and long term corporate debt obligations of which are rated no less than "A-" from S&P and "A3" from Moody's; and (x) the related Loan Documents require the Obligor to make all payments in respect of such Loan Asset free and clear of and without any deduction for any and all present or future taxes, levies, imposts, deductions, charges and withholdings, excluding taxes imposed on net income and all income and franchise taxes of the United States and any political subdivision thereof. "EQUITY SECURITIES" shall mean common and preferred stock, including without limitation common stock purchase warrants and rights, equity interests in trusts, partnerships, joint ventures or similar enterprises and depositary receipts, but excluding equity securities that are attached to, or part of a unit with debt securities. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA GROUP" shall mean the Borrower and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. "EUROCURRENCY LIABILITIES" shall have the meaning assigned to such term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "EURODOLLAR ADDITIONAL YIELD" means additional Yield on the outstanding principal of each Advance during the Settlement Period in respect of such Advance in respect of which Yield is computed by reference to the Eurodollar Rate, for such Settlement Period, at a rate per annum equal at all times during such Settlement Period to the remainder obtained by subtracting (i) the Eurodollar Rate for such Settlement Period from (ii) the rate obtained by dividing such Eurodollar Rate referred to in clause (i) above by that percentage equal to one-hundred percent (100%) minus the Eurodollar Rate Reserve Percentage of the Lender or a Secondary Lender, as applicable to an Advance, for such Settlement Period. 9 "EURODOLLAR RATE" means, for any Advance for any Settlement Period, an interest rate per annum equal to the rate per annum at which deposits in Dollars are offered by the principal office of Citibank in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two (2) Business Days before the first day of such Settlement Period in an amount substantially equal to the outstanding principal amount of such Advance on such first day and for a period equal to such Settlement Period. "EURODOLLAR RATE ADVANCE" shall mean an Advance the Yield on which is computed with reference to the Eurodollar Rate. "EURODOLLAR RATE RESERVE PERCENTAGE" for any Settlement Period for any Eurodollar Rate Advance shall mean the reserve percentage applicable during such Settlement Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) (or if more than one such percentage shall be applicable, the daily average of such percentages for those days in such Settlement Period during which any such percentage shall be so applicable) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for the Lender or any Secondary Lender, if applicable to an Advance, with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or any other category of liabilities that includes deposits by reference to which the interest rate on Eurocurrency Liabilities is determined) having a term comparable to such Settlement Period. "EVENT OF DEFAULT" shall mean any of the events, acts or occurrences set forth in Section 6.01. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules or regulations, and any reference to any statutory or regulatory provision shall be deemed to be a reference to any successor statutory or regulatory provision. "FEDERAL FUNDS RATE" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Citibank from three Federal funds brokers of recognized standing selected by it. "FEE LETTER" shall mean that certain letter agreement dated the date hereof between the Borrower and the Agent, as the same may from time to time be amended, supplemented, waived or modified. 10 "FOREIGN ASSET" shall mean any Asset issued or Guaranteed by a Person organized outside of the United States and in the case of any Loan Asset the related Obligor is organized outside of the United States. "GAAP" shall mean generally accepted accounting principles in the United States, in effect from time to time, consistently applied. "GOVERNMENTAL AUTHORIZATIONS" shall mean all franchises, permits, licenses, approvals, consents and other authorizations of all Authorities. "GOVERNMENTAL FILINGS" shall mean all filings, including franchise and similar tax filings, and the payment of all fees, assessments, interests and penalties associated with such filing with all Authorities. "GUARANTEE" by any Person shall mean any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "ILLIQUID ASSET" means as of any date, any Asset for which the Value of such Asset is not readily ascertainable from a recognized independent source in the market for such Asset. "INDUSTRY CLASS" shall mean the Credit Suisse First Boston High Yield Index and, to the extent such index is no longer published, each industry class specified in Moody's industry classifications. "INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of 1986, as amended or any successor statute. "INVESTMENT COMPANY ACT" shall mean the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules or regulations, and any reference to any statutory or regulatory provision shall be deemed to be a reference to any successor statutory or regulatory provision. 11 "INVESTMENT POLICIES AND RESTRICTIONS" shall mean the provisions dealing with investment policies, distributions, investment restrictions, tender offers, repurchases, leverage and diversified status as set forth in the Borrower's Prospectus in effect on the Closing Date, or as modified as permitted under this Agreement. "INVESTOR REPORT" shall mean the Investor Report of the Borrower substantially in the form of Schedule I hereto. "LAW" shall mean any action, code, consent decree, constitution, decree, directive, enactment, guideline, law, injunction, interpretation, judgment, order, ordinance, policy statement, proclamation, promulgation, regulation, requirement, rule, rule of law, rule of public policy, statute, or writ of any Authority. "LENDER" shall mean CRC, together with all Persons which acquire any interest in any Advance under the Asset Purchase Agreement. "LENDER RATE" for each day during a Settlement Period any Advance means to the extent the Lender funds such Advance on such day by issuing commercial paper notes, the per annum rate equivalent to the weighted average of the per annum rates paid or payable by the Lender from time to time as interest on or otherwise (by means of interest rate hedges or otherwise) in respect of those commercial paper notes issued by the Lender that are reasonably allocated, in whole or in part, by the Agent (on behalf of the Lender) to fund the making or maintenance of such Advance on such day as determined by the Agent (on behalf of the Lender) and reported to the Borrower, which rates shall reflect and give effect to the commissions of placement agents (which shall not exceed 0.05% per annum of the face amount of the commercial paper notes) and dealers in respect of such commercial paper notes, to the extent such commissions are allocated, in whole or in part, to such commercial paper notes by the Agent on behalf of the Lender; PROVIDED, HOWEVER, that if any component of such rate is a discount rate, in calculating the "Lender Rate" for such day the Agent shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum. "LENDER TERMINATION DATE" shall mean the date which is the earliest to occur of (i) the date which is one (1) Business Day prior to the Secondary Lender Stated Expiration Date, and (ii) the date on which the Total Commitment shall terminate pursuant to Section 2.10 or Section 6.01. "LETTER AGREEMENT" shall mean the Letter Agreement dated as of the date hereof from the Adviser to the Agent on behalf of the Secured Parties, as the same may from time to time be amended, supplemented, waived or modified. "LIEN" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien or security interest (statutory or other), priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as 12 any of the foregoing, and the filing of any effective financing statement under the UCC or comparable law of any jurisdiction). "LIQUIDATION FEE" means, in respect of any Advance for any Settlement Period during which the principal on such Advance is repaid by the Borrower in whole or in part, the amount, if any, by which (i) the additional Yield (calculated without taking into account any Liquidation Fee or any shortened duration of such Settlement Period) which would have accrued during such Settlement Period on the reduction of the outstanding principal amount of such Advance relating to such Settlement Period had such reductions remained as outstanding principal, exceeds (ii) that income, if any, received by the Lender's investing the proceeds of such reductions of principal. "LOAN ASSET" shall mean a direct or participation or subparticipation interest in or assignment or novation of a loan made to a corporate borrower by one or more commercial banks or other financial institutions, as described in the Prospectus in effect on the Closing Date under the heading "Corporate Loans". "LOAN DOCUMENTS" means with respect to any Loan Asset, each loan agreement, promissory note, collateral security agreement and any other document evidencing, securing or executed in connection with such Loan Asset, including without limitation, the agreements and instruments in respect of which the Borrower acquired such Loan Asset. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the ability of the Borrower, the Adviser, or the Custodian to fully perform its obligations under this Agreement or any other Program Document, (ii) any Secured Party's right, title and interest in the Assigned Collateral and the Related Security or on the rights and remedies of any Secured Party under any Program Document, or (iii) the business, financial condition, operations of the Borrower, or (iv) a significant portion of the Assets or properties of the Borrower. "MATURITY DATE" shall mean (i) with respect to any Advance made by the Lender, the Lender Termination Date (or if such day is not a Business Day, the Business Day immediately preceding such date) or such earlier date as provided in Section 6.01, and (ii) with respect to any Advance made by a Secondary Lender, including the Committed Advance, the date which is four (4) years after the Borrowing Date of such Advance (or if such day is not a Business Day, the Business Day immediately preceding such date) or such earlier date as provided in Section 6.01. "MOODY'S" shall mean Moody's Investors Service, Inc., together with its successors. "MULTIEMPLOYER PLAN" shall mean at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, 13 including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NET ASSET VALUE" shall mean, with respect to the Borrower, as of the date any determination thereof is made, the net asset value of the Borrower computed in the manner such net asset value is required to be computed by the Borrower in its reports to its shareholders. "NET ELIGIBLE ASSET VALUE" shall mean on the date any determination thereof is made, an amount equal to the aggregate Asset Value of all Eligible Assets reduced by the sum (without duplication) of: (i) the amount by which the aggregate Asset Value of all Eligible Assets (other than U.S. Government Securities and money market mutual funds) issued, Guaranteed or owing by any Person (together with all Affiliates of such Person), other than the three Persons (together with all Affiliates of such Person) that have the highest amounts of aggregate Asset Value of all Eligible Assets relating to them (the "Three Largest Obligors"), exceeds five percent (5%) of the aggregate Asset Value of all Eligible Assets; (ii) the amount by which the aggregate Asset Value of all Eligible Assets (other than U.S. Government Securities and money market mutual funds) issued, Guaranteed or owing by any of the Three Largest Obligors exceeds eight percent (8%) of the aggregate Asset Value of all Eligible Assets; (iii) the amount by which the aggregate Asset Value of all Eligible Assets which constitute shares of any single money market mutual fund exceeds twenty percent (20%) of the aggregate Asset Value of all Eligible Assets; (iv) the amount by which the aggregate Asset Value of all Eligible Assets (other than U.S. Government Securities) issued, Guaranteed or owing by Persons in a single Industry Class, other than the one Industry Class with the highest amounts of the aggregate Asset Value of all Eligible Assets attributable to it (the "Largest Industry"), exceeds twenty percent (20%) of the aggregate Asset Value of all Eligible Assets; (v) the amount by which the aggregate Asset Value of all Eligible Assets (other than U.S. Government Securities) issued, Guaranteed or owing by all Persons in the Largest Industry exceeds twenty-five percent (25%) of the aggregate Asset Value of all Eligible Assets; 14 (vi) the amount by which the aggregate Asset Value of all Eligible Assets which constitute Single Market Source Assets exceeds twenty-five percent (25%) of the aggregate Asset Value of all Eligible Assets; (vii) the amount by which the aggregate Asset Value of all Eligible Assets which constitute Foreign Assets exceeds thirty-five percent (35%) of the aggregate Asset Value of all Eligible Assets; (viii)the amount by which the aggregate Asset Value of all Eligible Assets which are denominated or payable in a currency other than Dollars exceeds fifteen percent (15%) of the aggregate Asset Value of all Eligible Assets; (ix) the amount by which the aggregate Asset Value of all Eligible Assets issued, Guaranteed or owing by Persons organized under the laws of any single jurisdiction which is not an OECD Country exceeds five percent (5%) of the aggregate Asset Value of all Eligible Assets; (x) the amount by which the aggregate Asset Value of all Eligible Assets issued, Guaranteed or owing by Persons organized under the laws of all jurisdictions that are not OECD Countries exceeds fifteen percent (15%) of the aggregate Asset Value of all Eligible Assets; (xi) the amount by which the aggregate Asset Value of all Eligible Assets which constitute Distressed Assets exceeds ten percent (10%) of the aggregate Asset Value of all Eligible Assets; (xii) the amount by which the aggregate Asset Value of all Eligible Assets which constitute Distressed Assets issued, Guaranteed or owing by any single Person (together with all Affiliates of such Person) exceeds three percent (3%) of the aggregate Asset Value of all Eligible Assets; (xiii)the amount by which the aggregate Asset Value of all Eligible Assets which as of any date of determination constitute a Distressed Asset or which are rated "Caa" by Moody's or "CCC" by S&P or, if unrated, are in the judgment of the Adviser of equivalent credit quality exceeds forty percent (40%) of the aggregate Asset Value of all Eligible Assets; (xiv) the amount by which the aggregate Asset Value of all Eligible Assets which constitute Equity Securities exceeds twenty percent (20%) of the aggregate Asset Value of all Eligible Assets; (xv) the amount by which the aggregate Asset Value of all Eligible Assets which constitute Equity Securities issued by any single Person 15 exceeds three percent (3%) of the aggregate Asset Value of all Eligible Assets; and (xvi) the Aggregate Custodian's Advance Amount. "NOTICE OF BORROWING" shall have the meaning assigned to such term in Section 2.02. "NOTICE OF EXCLUSIVE CONTROL" shall have the meaning assigned to such term in the Control Agreement. "OBLIGOR" shall mean in respect of any Loan Asset, the Person primarily obligated under the related Loan Documents to repay the loan or extension of credit which is the subject of such Loan Asset. "ORIGINATION DATE" shall mean in respect of any Loan Asset the initial date on which the proceeds of the loan or other extension of credit which is the subject of such Loan Asset was advanced to the Obligor under the related Loan Documents. "OECD COUNTRY" means Israel and any country which is a member of the Organization for Economic Cooperation and Development which has a sovereign credit rating for "foreign currency" of at least "AA-" and "Aa3" from S&P and Moody's, respectively. "PERCENTAGE" of any Secondary Lender means, (a) with respect to Citibank, the percentage set forth on the signature page to this Agreement, or such amount as reduced by any Assignment and Acceptance entered into with an Eligible Assignee, or (b) with respect to a Secondary Lender that has entered into an Assignment and Acceptance, the amount set forth therein as such Secondary Lender's Percentage, or such amount as reduced by an Assignment and Acceptance entered into between such Secondary Lender and an Eligible Assignee. "PERMITTED DEBT" shall mean (i) Debt arising under this Agreement or the other Program Documents to the Secured Parties, (ii) accrued expenses and current trade accounts payable incurred in the ordinary course of the Borrower's business which are not overdue for a period of more than thirty (30) days or which are being contested in good faith by appropriate proceedings, (iii) Debt in favor of the Custodian relating to Custodian Overdraft Advances incurred in the ordinary course of the Borrower's business, (iv) Debt in respect of judgments or awards that have been in force for less than the applicable period for taking an appeal so long as such judgments or awards do not constitute an Event of Default and so long as execution is not levied thereunder or in respect of which the Borrower (A) shall at the time in good faith be diligently prosecuting an appeal or proceeding for review and in respect of which a stay of execution shall have been obtained pending such appeal or review or (B) shall have obtained an unsecured performance bond in respect of such judgment or 16 award, and (v) Debt (other than Debt for borrowed money) arising in connection with transactions in the ordinary course of the Borrower's business in connection with its purchasing of securities, Derivatives Transactions, reverse repurchase agreements or dollar rolls to the extent such transactions are permitted under the Investment Company Act and the Borrower's Investment Policies and Restrictions. "PERMITTED LIENS" shall mean in respect of any Asset of the Borrower (i) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on the Borrower's books, (ii) Liens of the Custodian securing the Custodian's Overdraft Advances, and (iii) Liens incidental to the conduct of the Borrower's business securing the performance of fee and expense obligations to the Custodian and other similar agents which are providing services in respect of the Borrower's Assets arising in the ordinary course of the Borrower's business. "PERSON" shall mean an individual or a corporation (including a business trust), partnership, trust, incorporated or unincorporated association, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind. "PLAN" shall mean at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "POST-DEFAULT RATE" shall mean in respect of all amounts payable to any Secured Party under any Program Document not paid when due (whether at stated maturity, by acceleration or otherwise), including, without limitation, the principal and Yield on any Advance not paid when due, a rate per annum during the period commencing on the due date until such amount is paid in full equal to the Alternative Base Rate as in effect from time to time plus two percent (2%). "PRINCIPAL OFFICE" shall mean the principal office of Citibank presently located at 399 Park Avenue, New York, New York. "PRIVATE AUTHORIZATIONS" shall mean all franchises, permits, licenses, approvals, consents and other authorizations of all Persons (other than Authorities) including, without limitation, those with respect to trademarks, service marks, trade names, copyrights, computer software programs, technical and other know-how. 17 "PROCEEDS" shall have, with reference to any asset or property, the meaning assigned to it under the UCC and, in any event, shall include, but not be limited to, any and all amounts from time to time paid or payable under or in connection with such asset or property. "PROGRAM DOCUMENTS" shall mean this Agreement, the Advance Notes, the Letter Agreement, the Asset Purchase Agreement, the Control Agreement, Advisory Agreement, the Custodial Agreement, the Fee Letter and the other agreements, documents and instruments entered into or delivered in connection herewith or therewith. "PROSPECTUS" shall mean with respect to the Borrower the prospectus filed with the SEC as a part of the Borrower's registration statement on Form N-2, as amended (or any successor SEC form), and shall include, without limitation, the related statement of additional information included in such registration statement. "REGULATION T" shall mean Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REGULATION U" shall mean Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REGULATION X" shall mean Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time. "RELATED SECURITY" shall have the meaning assigned to such term in Section 7.01. "S&P" shall mean Standard & Poor's Ratings Group, together with its successors. "SEC" shall mean the Securities and Exchange Commission or any other governmental authority of the United States of America at the time administrating the Securities Act, the Investment Company Act or the Exchange Act. "SECONDARY LENDER COMMITMENT" shall mean (a) with respect to Citibank, an amount equal to the Total Commitment, as such amount shall be reduced by any Assignment and Acceptance entered into between Citibank and an Eligible Assignee, or (b) with respect to a Secondary Lender that has entered into an Assignment and Acceptance, the amount set forth therein as such Secondary Lender's "Secondary Lender Commitment", in each case as such amount may be reduced by an Assignment and Acceptance entered into between such Secondary Lender and an Eligible Assignee, and as may be further reduced (or terminated) pursuant to the next sentence. Any reduction (or termination) of the 18 Total Commitment pursuant to the terms of this Agreement shall reduce ratably (or terminate) each Secondary Lender's Secondary Lender Commitment. "SECONDARY LENDER STATED EXPIRATION DATE" shall mean October 22, 1999, UNLESS, prior to such date (or the date so extended pursuant to this clause), upon the Borrower's request, made not more than forty-five (45) days nor less than thirty (30) days prior to the then current Secondary Lender Stated Expiration Date, one or more Secondary Lenders having 100% of the Total Commitment shall in their sole discretion consent, which consent shall be given not less than ten (10) days prior to the then current Secondary Lender Stated Expiration Date (the date any such consent is given, the "Extension Date"), to the extension of the Secondary Lender Stated Expiration Date to the date occurring 364 days after such Extension Date; PROVIDED, HOWEVER, that any failure of any Secondary Lender to respond to the Borrower's request for such extension shall be deemed a denial of such request by such Secondary Lender. "SECONDARY LENDER TERMINATION DATE" shall mean the earlier of (a) the Secondary Lender Stated Expiration Date, and (b) the date the Total Commitment shall terminate pursuant to Section 2.10 or Section 6.01. "SECTION 20 AFFILIATE" means an Affiliate of a Federal Reserve member bank which engages principally in the securities business, to the extent allowed under and pursuant to Section 20 of the Glass-Steagall Act, as amended. "SECONDARY LENDERS" shall mean Citibank and each Eligible Assignee that becomes a party to this Agreement pursuant to Section 9.06. "SECURED PARTIES" shall mean the Agent, the Lender, the Secondary Lenders and their respective successors and assigns. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules or regulations, and any reference to any statutory or regulatory provisions shall be deemed to be a reference to any successor statutory or regulatory provision. "SETTLEMENT DATE" shall mean the date which is two (2) Business Days after the end of each Settlement Period. 19 "SETTLEMENT PERIOD" shall mean in respect of any Advance: (a) in the case of any Settlement Period in respect of which Yield is computed by reference to the Lender Rate, the period beginning on the date such Advance was made and ending on the last day of the calendar month in which such Advance was made and thereafter each successive period commencing on the first day of each calendar month during the term of this Agreement and ending on the last day of such calendar month during the term of this Agreement; PROVIDED, HOWEVER, that in the case of any Settlement Period for any Advance which commences before the Maturity Date for such Advance and would otherwise end on a date occurring after such Maturity Date, such Settlement Period shall end on such Maturity Date; (b) in the case of any Settlement Period in respect of which Yield is computed by reference to the Assignee Rate, the period beginning on the date such Advance was made and ending on the last day of the calendar month in which such Advance was made and thereafter each successive period commencing on the first day of each calendar month during the term of this Agreement and ending on the last day of such calendar month during the term of this Agreement; PROVIDED, HOWEVER, that any Settlement Period which is other than the monthly Settlement Period shall be of such duration as shall be selected by the Agent; and (c) in the case of any Settlement Period in respect of which Yield is computed by reference to the Alternate Base Rate, such Settlement Period shall be of such duration as shall be selected by the Agent. "SINGLE MARKET SOURCE ASSET" shall mean any Asset for which Value is only readily ascertainable by one (1) recognized independent broker dealer or recognized independent pricing service in the market for such Asset which broker dealers or pricing services have been approved by the Adviser in accordance with the guidelines established by the Borrower's Board of Directors. "TOTAL COMMITMENT" shall mean $200,000,000 as such amount may be reduced pursuant to Section 2.10. References to the unused portion of the Total Commitment shall mean, at any time, the Total Commitment then in effect, minus the outstanding principal amount of the Advances. "TOTAL ELIGIBLE ASSET COVERAGE TEST" shall mean as of any day of determination, and after giving effect to all transactions on such day, that the Credits Outstanding are less than or equal to 33 1/3% of the Net Eligible Asset Value. "TRANSACTION AGENT" means a commercial bank, insurance company, finance company or other financial institution that is acting as agent under the Loan Documents relating to any Loan Asset. 20 "UCC" shall mean the Uniform Commercial Code, as from time to time in effect in the applicable jurisdictions. "U.S. GOVERNMENT SECURITIES" shall mean any securities which are direct obligations of, or obligations the principal and interest on are unconditionally guaranteed by the United States of America. "VALUE" shall have the meaning assigned to such term in Section 2(a)(41) of the Investment Company Act. "WEEKLY PORTFOLIO REPORT" shall have the meaning assigned to such term in Section 5.01(e)(vii). "YEAR 2000 PROBLEM" shall have the meaning assigned to such term in Section 4.01(p). "YIELD" means for each Advance for each Settlement Period: (i) for each day during such Settlement Period to the extent such Advance will be funded on such day by CRC through the issuance of commercial paper notes, LR x P + LF --- 360 (ii) for each day during such Settlement Period to the extent such Advance will be funded on such day by the Secondary Lenders or the Lenders, other than CRC, AR x P --- 360 where: AR = the Assignee Rate for such Advance for such Settlement Period P = the outstanding principal amount of such Advance on such day LR = the Lender Rate for such Advance on such day 21 LF = the Liquidation Fee, if any, for such Advance for such Settlement Period; PROVIDED, FURTHER, that Yield for any Advance shall not be considered paid by any distribution to the extent that at any time all or a portion of such distribution is rescinded or must otherwise be returned for any reason. SECTION I.02. RULES OF CONSTRUCTION. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: Singular words shall connote the plural as well as the singular, and vice versa (except as indicated), as may be appropriate. The words "herein," "hereof" and "hereunder" and other words of similar import used herein refer to this Agreement as a whole and not to any particular appendix, article, schedule, section, paragraph, clause, exhibit or other subdivision. The headings, subheadings and table of contents set forth in this Agreement are solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect the meaning, construction or effect of any provision hereof. References in this Agreement to "including" shall mean including without limiting the generality of any description preceding such term, and for purposes hereof the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned. Each of the parties to this Agreement and its counsel have reviewed and revised, or requested revisions to, this Agreement, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall be inapplicable in the construction and interpretation of this Agreement. SECTION I.03. COMPUTATION OF TIME PERIODS. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" both mean "to but excluding". 22 ARTICLE II ADVANCES TO THE BORROWER SECTION I.04. ADVANCE FACILITY. On the terms and conditions hereinafter set forth, including without limitation, Sections 3.01 and 3.02, CRC may, in its sole discretion, make Advances to the Borrower on any Borrowing Date from the date hereof to the Lender Termination Date. On the terms and conditions hereinafter set forth, including without limitation, Sections 3.01 and 3.02 and during the period from the date hereof to the Secondary Lender Termination Date, the Secondary Lenders shall make Advances to the Borrower, ratably in accordance with their respective Secondary Lender Commitments, to the extent CRC has determined not to make such Advance. Under no circumstances shall CRC or any Secondary Lender make any such Advance, to the extent that after giving effect to the making of such Advance the aggregate principal amount of all outstanding Advances would exceed the Total Commitment. SECTION I.05. MAKING OF ADVANCES. (a) The Borrower shall give the Agent written notice (which notice shall be irrevocable and effective only upon receipt by the Agent) of each request for an Advance (each such request a "Notice of Borrowing") not later than 12:00 noon (New York City time) on the day which is three (3) Business Days prior to the proposed borrowing date, which notice shall specify (i) the proposed borrowing date therefor (each such date, a "Borrowing Date"), and (ii) the principal amount of the proposed Advance. Any such Notice of Borrowing shall be substantially in the form of Exhibit B hereto, dated the date such request is being made, and otherwise appropriately completed. Each Advance shall be in a principal amount of at least $1,000,000 and in integral multiples of $1,000,000 in excess thereof. During the period prior to the Lender Termination Date, CRC shall promptly notify the Agent whether it has determined to make a proposed Advance and the Agent shall promptly thereafter notify the Borrower whether CRC has determined to make such Advance. If CRC has determined not to make a proposed Advance or if the Lender Termination Date has occurred prior to the Secondary Lender Termination Date, the Agent shall promptly send notice of the proposed Advance to all of the Secondary Lenders concurrently by telecopier, telex or cable specifying the Borrowing Date for such Advance, each Secondary Lender's Percentage multiplied by the principal amount of such Advance and whether the Yield for such Advance is calculated based on the Eurodollar Rate or the Alternate Base Rate. On any Borrowing Date CRC or the Secondary Lenders shall, subject to the terms and conditions of this Agreement, make available to the Borrower at the Borrower's Account the principal amount of the requested Advance in immediately available funds. To the extent not covered by Section 2.08, the Borrower shall indemnify CRC, each Secondary Lender and the Agent against any loss or expense incurred by them as a result of any failure by the Borrower to accept any Advance requested in a Notice of Borrowing or as a result of the failure of the Borrower to receive any Advance requested in a Notice of Borrowing as a result of the failure of any condition precedent to the making of 23 such Advance to be satisfied, including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of funds acquired or requested to fund such Advance. (b) The parties hereto agree that on the Maturity Date of the Advances made by CRC (the "CRC Maturity Date") so long as no Default or Event of Default shall have occurred and be continuing on such date, and subject to the other terms and conditions of this Agreement (other than the obligation to deliver a Notice of Borrowing), the Secondary Lenders shall make an Advance (the "Committed Advance") on such date in a principal amount equal to the outstanding principal amount of the Advances funded by CRC, unless on or prior to the Second Business Day preceding the CRC Maturity Date the Borrower has delivered a written notice to the Agent stating that it has elected not to receive such Committed Advance. Notwithstanding anything in this Agreement to the contrary, the principal amount of such Committed Advance shall be made ratably by the Secondary Lenders to the Agent's Account and shall constitute a payment in full by the Borrower in respect of the outstanding principal amount of the Advances maturing on the CRC Maturity Date and shall be applied by the Agent on the CRC Maturity Date to the outstanding principal amount of the Advances made by CRC. SECTION I.06. ADVANCE NOTES. (a) All Advances by CRC and each Secondary Lender to the Borrower shall be evidenced by separate Advance Notes, with appropriate insertions, which shall (i) be payable to CRC and each Secondary Lender and provide for the payment of the unpaid principal amount of the Advances evidenced thereby on the Maturity Date for such Advances, (ii) require that the Borrower pay Yield on the outstanding principal amount as provided in Section 2.06 hereof, and (iii) be entitled to the benefits of this Agreement and the other Program Documents. The date and principal amount of each Advance and of each repayment of principal thereon shall be recorded by CRC or the Secondary Lenders, as the case may be, or their designee on Schedule I attached to CRC's or such Secondary Lender's Advance Note and the aggregate unpaid principal amount shown on such schedules shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Advances. The failure to record or any error in recording any such amount on such schedule shall not, however, limit or otherwise affect the obligations of the Borrower hereunder or under any Advance Note to repay the principal amount of the Advances together with all Yield thereon. (b) The Borrower agrees that upon any Eligible Assignee becoming a Secondary Lender hereunder in accordance with Section 9.06, it shall promptly upon the request of the Agent execute and deliver an Advance Note payable to the order of such Secondary Lender and otherwise appropriately completed. 24 SECTION I.07. MATURITY OF THE ADVANCES. It is understood and agreed that the principal amount of and the unpaid Yield on each outstanding Advance shall be due and payable on the Maturity Date for such Advance. SECTION I.08. PREPAYMENT OF THE ADVANCES. (a) It is understood and agreed that the Borrower shall have the right at any time and from time to time, upon not less than three (3) Business Days' prior written or telephonic notice (in the case of telephonic notice, promptly confirmed in writing) to the Agent specifying the date and amount of such prepayment, to prepay all or a portion of the outstanding Advances, together with unpaid Yield thereon, on a Business Day; PROVIDED, that any such prepayment, if a partial prepayment, shall be an integral multiple of $1,000,000 with a minimum amount of $1,000,000. (b) If at any time the Borrower does not comply with the Borrowing Base Test, the Borrower shall, no later than the close of business on the next Business Day following the occurrence of such compliance shortfall: (i) either (x) transfer into the Collateral Account additional Eligible Collateral having an Asset Value at least sufficient to cause the aggregate Asset Value of the Assigned Collateral to satisfy the Borrowing Base Test; or (y) prepay Advances in a principal amount (and pay the Yield thereon) at least sufficient to cause the aggregate Asset Value of the Assigned Collateral to satisfy the Borrowing Base Test, and (ii) deliver to Agent a certificate, signed by an authorized officer of the Borrower, that (x) specifies the amount of the compliance shortfall; (y) specifies the identity and Asset Value of the additional Eligible Collateral transferred, or the principal amount of Advances prepaid, as applicable; and (z) certifies that such compliance shortfall has been cured. (c) If at any time the Borrower does not comply with the Total Eligible Asset Coverage Test, the Borrower shall: (i) no later than the close of business on the fifth Business Day following the occurrence of such compliance shortfall either (A) acquire additional Eligible Assets having an Asset Value at least sufficient to cause Credits Outstanding to be less than or equal to 32-1/3% of the Net Eligible Asset Value, as determined on the second Business Day after the occurrence of such compliance shortfall, or (B) prepay Advances in a principal amount (and pay the Yield thereon) at least sufficient to cause Credits Outstanding to be less than or equal to 32-1/3% of the Net Eligible Asset Value, as determined on the second Business Day after the occurrence of such compliance shortfall; and (ii) no later than the close of business on the second Business Day following the occurrence of such compliance shortfall, deliver to the Agent a certificate, signed by an authorized officer of the Borrower, that certifies (1) the amount of the compliance shortfall, (2) specifies whether the Borrower shall either (x) prepay the Advances in accordance with clause (B) above, or (y) acquire additional Eligible Assets in accordance with clause (A) above and specifying the identity and Asset Value of the Eligible Assets for which the Borrower has entered into corrective trades in order to satisfy the requirements of clause (A) of this Section 2.05(c), and (3) certifies that the requirements of this Section 2.05(c) shall be satisfied on or 25 prior to the fifth Business Day following the occurrence of such compliance shortfall. (d) The amount of each prepayment under this Section 2.05 shall be applied to the Advances in the order in which such Advances were made. SECTION I.09. YIELD. The Borrower hereby agrees to pay the Yield computed with reference to the principal amount of each Advance outstanding from time to time. Yield accruing in respect of any Advance for any Settlement Period shall be due and payable on the Settlement Date immediately succeeding such Settlement Period and as required by Section 2.05. It is the intention of the parties hereto that the Yield on the Advances shall not exceed the maximum rate permissible under applicable law. Accordingly, anything herein or in any Advance Note to the contrary notwithstanding, in the event any Yield is charged to, collected from or received from or on behalf of the Borrower by the Lender or the Secondary Lenders pursuant hereto or thereto in excess of such maximum lawful rate, then the excess of such payment over that maximum shall be applied first to the payment of amounts owing by the Borrower to the Lender, the Secondary Lenders and the Agent under the Program Documents (other than in respect of principal and Yield on Advances) and then to the reduction of the outstanding principal balance of the Advances. SECTION I.10. INCREASED COSTS. If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements reflected in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any Applicable Law or (ii) the compliance with any guideline or request from any central bank or other Authority (whether or not having the force of law), there shall be any increase in the cost to the Lender or any Secondary Lender or any of their respective Affiliates (each an "Affected Person") of agreeing to make or making, funding or maintaining Eurodollar Rate Advances to the Borrower, then the Borrower shall from time to time, upon demand by the Lender or such Secondary Lender pay to the Agent for the account of the Lender or such Secondary Lender additional amounts sufficient to compensate the Lender or such Secondary Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower by the Lender or such Secondary Lender, shall be conclusive and binding for all purposes, absent manifest error. If an Affected Person determines that compliance with any Applicable Law or request from any central bank or other Authority charged with the interpretation or administration thereof (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Affected Person and that the amount of such capital is increased by or based upon the existence of such Affected Person's commitment under the Program Documents or upon such Affected Person's making, funding or maintaining Advances, then, upon demand of such Affected Person (with a copy of 26 such demand to the Agent), the Borrower shall immediately pay to the Agent for the account of such Affected Person, from time to time as specified by such Affected Person, additional amounts sufficient to compensate such Affected Person in light of the circumstances. A certificate setting forth in reasonable detail such amounts submitted to the Borrower by such Affected Person shall be conclusive and binding for all purposes, absent manifest error. SECTION I.11. COMPENSATION. The Borrower shall compensate the Lender and each Secondary Lender, upon its written request (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including, without limitation, any interest paid by the Lender and each Secondary Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Advances and any loss sustained by the Lender or any such Secondary Lender in connection with the re-employment of such funds, but excluding any loss of anticipated profit), which the Lender or any such Secondary Lender may sustain: (i) if for any reason (other than a default by the Lender or such Secondary Lender) a borrowing of any Eurodollar Rate Advance by the Borrower does not occur on a date specified therefor in the Notice of Borrowing (whether or not withdrawn), (ii) if any prepayment of any of the Borrower's Eurodollar Rate Advances occurs on a date which is not the last day of a Settlement Period applicable thereto, (iii) if any prepayment of any of the Borrower's Eurodollar Rate Advances is not made on any date specified in a notice of prepayment given by the applicable Borrower, or (iv) as a consequence of any other default by the Borrower to repay its Eurodollar Rate Advances when required by the terms of this Agreement. SECTION I.12. ADDITIONAL YIELD ON EURODOLLAR RATE ADVANCES. If the Lender or any Secondary Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, the Borrower shall pay to the Lender or such Secondary Lender Eurodollar Additional Yield on the principal amount of each outstanding Advance on each date on which Yield is payable on such Advance. Such Eurodollar Additional Yield shall be determined by the Lender or such Secondary Lender and notified to the Borrower through the Agent within thirty (30) days after any Interest payment is made with respect to which such additional Yield is requested. A certificate as to such Eurodollar Additional Yield submitted to the Borrower and the Agent shall be conclusive and binding for all purposes, absent manifest error. SECTION I.13. TERMINATION OR REDUCTION OF THE TOTAL Commitment. The Borrower may at any time, upon thirty (30) days prior written notice to the Agent terminate in whole or reduce in part the unused portion of 27 the Total Commitment; PROVIDED, that each such partial reduction of the Total Commitment shall be in an amount equal to at least $5,000,000 or an integral multiple thereof. SECTION I.14. RESCISSION OR RETURN OF PAYMENT. The Borrower further agrees that, if at any time all or any part of any payment theretofore made by it to any Secured Party or their designees is or must be rescinded or returned for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of the Borrower or any of its affiliates), the obligation of the Borrower to make such payment to such Secured Party shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence and this Agreement shall continue to be effective or be reinstated, as the case may be, as to such obligations, all as though such payment had not been made. SECTION I.15. FEES PAYABLE BY BORROWER. The Borrower agrees to pay the Agent such fees as are set forth in the Fee Letter. SECTION I.16. POST DEFAULT INTEREST. The Borrower hereby promises to pay interest on the unpaid principal amount of each Advance and any other amount payable by the Borrower hereunder, in each case, which shall not be paid in full when due, for the period commencing on the due date thereof until but not including the date the same is paid in full at the Post-Default Rate. Interest payable at the Post-Default Rate shall be payable on the Agent's demand. SECTION I.17. PAYMENTS. (a) All amounts owing and payable by the Borrower to the Agent, the Lender or any Secondary Lender, in respect of the Advances, including, without limitation, the principal thereof, Yield, fees, expenses or other amounts payable under the Program Documents, shall be paid in Dollars, in immediately available funds by wire transfer initiated on or prior to 11:00 a.m. (New York City time) on the date due without counterclaim, setoff, deduction, defense, abatement, suspension or deferment to the Agent's Account. Any payment initiated after 11:00 a.m. (New York City time) on any day shall be deemed to have been made on the next Business Day for all purposes of this Agreement. (b) All computations of interest at the Post-Default Rate and all computations of Yield, fees and other amounts hereunder shall be made on the basis of a year of 360 days for the actual number of days elapsed. Whenever any payment to be made hereunder shall be due on a day other than a Business Day, 28 such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of such payment. (c) Upon receipt of funds deposited into the Agent's Account, the Agent shall distribute such funds, FIRST to the Lender and the Secondary Lenders in payment in full of all accrued and unpaid Yield owing to the Lender and Secondary Lenders, SECOND to the Lender, the Secondary Lenders or the Agent in payment of any other fees or other amounts owed by the Borrower to the Lender, the Secondary Lender and the Agent under this Agreement and the other Program Documents (other than in respect of the principal amount of the Advances), and THIRD to the payment of the principal amount of the Advances. (d) The Agent shall, on or prior to 12:00 Noon (New York City time) on the Business Day immediately preceding each Settlement Date, notify the Borrower of the Yield, Fees and other amounts due and payable on such Settlement Date. SECTION I.18. BORROWER'S OBLIGATIONS ABSOLUTE. The Borrower's obligations under this Agreement and under the other Program Documents shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms hereof and thereof, under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Agent, the Lender any Secondary Lender or any other Person. ARTICLE III CONDITIONS PRECEDENT SECTION I.19. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT. The effectiveness of this Agreement and the Lender's and the Secondary Lenders' obligations hereunder shall be subject to the conditions precedent that the Agent shall have received on or before the initial Borrowing Date the following, each (unless otherwise indicated) in form and substance reasonably satisfactory to the Agent in sufficient copies for the Lender and the Secondary Lenders: (a) each of the Program Documents duly executed and delivered by the parties thereto; (b) the Prospectus, as in effect on the Closing Date; 29 (c) the signed opinions of counsel to the Borrower, and the Adviser addressed to the Agent, the Lender and each Secondary Lender as to such matters as the Agent, the Lender and each Secondary Lender shall have reasonably requested; (d) an Advance Note duly executed and completed by the Borrower to the Lender and each Secondary Lender, which shall be in full force and effect; (e) all Governmental Authorizations, Private Authorizations and Governmental Filings, if any, which may be required in connection with the transactions contemplated by the Program Documents; (f) a certificate of the Secretary or Assistant Secretary of each of the Borrower and the Adviser certifying (i) as to its certificate of incorporation and by-laws, (ii) as to any resolutions of its Board of Directors approving this Agreement and the other Program Documents to which it is a party and the transactions contemplated hereby and thereby, (iii) that its representations and warranties set forth in the Program Documents are true and correct, and (iv) the incumbency and specimen signature of each of its officers authorized to execute the Program Documents; (g) acknowledgment copies or time stamped receipt copies of proper financing statements, duly filed on or before the date of such initial borrowing under the UCC in all jurisdictions necessary in order to perfect the interests in the Assigned Collateral contemplated by this Agreement; (h) acknowledgment copies or time stamped receipt copies of proper financing statements, if any, necessary to release all security interests and other rights of any Person in the Eligible Assets of the Borrower previously granted by the Borrower; (i) the Agent shall have received a pro-forma Investor Report, which shall evidence compliance with the terms of the Program Documents after giving effect to the initial borrowing of Advances under this Agreement; (j) the Agent shall have received the fees to be received by it on or prior to the Closing Date under the Fee Letter; (k) the results of a recent search by a Person satisfactory to the Agent of all UCC lien filings with respect to the Borrower, and such results shall be satisfactory to the Agent; and (l) the Agent shall have received from the Borrower such other instruments, certificates and documents as the Agent shall have reasonably requested, all in form and substance satisfactory to the Agent. 30 SECTION I.20. CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the Lender and the Secondary Lenders to make any Advance (including the initial Advance) on any Borrowing Date shall be subject to the fulfillment of the following conditions: (a) each of the representations and warranties of the Borrower, the Custodian and the Adviser contained in this Agreement, the Letter Agreement and the other Program Documents shall be true and correct as of such date; (b) no Default or Event of Default shall have occurred and be continuing at or prior to the time of the making of such Advance or shall result from the making of such Advance; (c) the conditions precedent set forth in Section 3.01 shall have been fully satisfied; (d) immediately after giving effect to such Advance the Borrower shall be in compliance with each of the Borrowing Base Test and the Total Eligible Asset Coverage Test; (e) immediately after the making of any such Advance, the aggregate outstanding principal amount of all Advances shall not exceed the Total Commitment; and (f) the Agent shall have received such other instruments, certificates and documents as the Agent or the Lender shall reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION I.21. REPRESENTATIONS AND WARRANTIES OF THE Borrower. The Borrower represents and warrants to each of the Secured Parties on and as of the Closing Date, each Borrowing Date, each date Assets are credited to or removed from the Collateral Account and the last day of each Settlement Period, as follows: (a) the Borrower is duly organized and validly existing in good standing under the laws of the State of Maryland, with full corporate power and authority to own and operate its assets and properties, conduct the business in 31 which it is now engaged and to execute and deliver and perform its obligations under this Agreement and the other Program Documents to which it is a party; (b) the Borrower is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business, assets and properties, including, without limitation, the performance of its obligations under this Agreement and the other Program Documents to which it is a party, requires such qualification; (c) the execution, delivery and performance by the Borrower of the Program Documents to which it is a party and the other instruments and agreements contemplated thereby are within its corporate powers and have been duly authorized by all requisite corporate action by the Borrower and have been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms; (d) neither the execution and delivery by the Borrower of this Agreement, the other Program Documents to which it is a party, or any instrument or agreement referred to herein or therein, or contemplated hereby or thereby, nor the consummation of the transactions herein or therein contemplated, nor compliance with the terms, conditions and provisions hereof or thereof by it, will (i) conflict with, or result in a breach or violation of, or constitute a default under its certificate of incorporation or by-laws or other organizational documents, (ii) conflict with or contravene any Applicable Law or any contractual restriction binding on or affecting the Borrower or any of its Assets, (iii) result in a breach or violation of, or constitute a default under, or permit the acceleration of any obligation or liability in, or but for any requirement of the giving of notice or the passage of time (or both) would constitute such a conflict with, breach or violation of, or default under, or permit any such acceleration in, any contractual obligation or any agreement or document to which it is a party or by which it or any of its properties is bound (or to which any such obligation, agreement or document relates), or (iv) result in any Adverse Claim upon any Asset of the Borrower; (e) the Borrower has obtained all necessary Governmental Authorizations and Private Authorizations, and made all Governmental Filings necessary for the execution, delivery and performance by the Borrower of this Agreement, the other Program Documents to which it is a party and the agreements and instruments contemplated hereby or thereby, and no Governmental Authorization, Private Authorization or Governmental Filing which have not been obtained or made, is required to be obtained or made by it in connection with the execution, delivery or performance of this Agreement and the other Program Documents; (f) this Agreement and the Control Agreement and the actions required to be taken pursuant to the terms hereof are effective to create and perfect in the Agent for the benefit of the Secured Parties a perfected security interest in the Assigned Collateral free and clear of all Adverse Claims; 32 (g) each Asset of the Borrower which constitutes Assigned Collateral is an Eligible Asset; the Borrower owns each such Eligible Asset free and clear of Adverse Claims (other than Permitted Liens); and as of the initial Borrowing Date and at all times thereafter, the Agent has a first priority perfected security interest in the Assigned Collateral free and clear of all Adverse Claims and no actions, except as have been taken, are necessary to perfect or protect such security interest; (h) no effective financing statements or other instruments similar in effect covering any Asset of the Borrower is on file in any recording office, except those filed in favor of the Agent pursuant to this Agreement; (i) the Borrower's principal place of business and chief executive office is at the address referred to in Section 5.01(d); (j) there are no pending or, to the best of the Borrower's knowledge, threatened investigations, actions, suits or proceedings involving the Borrower which give rise to a reasonable possibility of a Material Adverse Effect; (k) the Borrower is registered as a diversified, closed-end management investment company as such term is used in the Investment Company Act and is in compliance in all material respects with the Investment Policies and Restrictions; (l) the Prospectus, each Investor Report, each Weekly Portfolio Report, each Notice of Borrowing and all other written information, reports and statements (with respect to which, other than the Investor Report the Weekly Portfolio Report and each Notice of Borrowing, shall be taken as a whole) provided by or on behalf of the Borrower to any Secured Party for purposes of or in connection with this Agreement, the other Program Documents or the transactions contemplated hereby or thereby is, and all such information hereafter provided by or on behalf of the Borrower to any Secured Party will be true, correct and complete in all material respects on the date such information is stated or certified and no such information contains, or will contain, any material misrepresentation or any omission to state therein matters necessary to make the statements made therein not misleading in any material respect when considered in its entirety; (m) the Borrower is in compliance in all material respects with Applicable Law, including, without limitation, the Securities Act and the Investment Company Act; (n) the Borrower is not a member of an ERISA Group and has no Benefit Arrangement, Plan or Multiemployer Plan subject to ERISA; 33 (o) on each Borrowing Date and immediately after the making of each Advance itis in full compliance with the Borrowing Base Test and the Total Eligible Asset Coverage Test and the other conditions specified in Section 3.02; (p) the Borrower has reasonably determined that the Adviser has developed a program to address, on a timely basis (and in any event prior to December 31, 1999) and in all material respects, the risk that computer applications used in connection with the business and operations of the Borrower by the Adviser or by any of the Borrower's other material service providers may not properly perform date-sensitive functions involving certain dates prior to, during and after the year 2000 (the "Year 2000 Problem") and the Year 2000 Problem will not result in any Default or Event of Default by the Borrower and does not give rise to a reasonable possibility of a Material Adverse Effect; (q) the Borrower will qualify as a "regulated investment company" within the meaning of the Internal Revenue Code, and as such its income is not, and will not be, subject to income tax at the corporate level under the Internal Revenue Code; (r) the Borrower has filed all United States Federal income tax returns and all other material tax returns which are required to be filed by it, if any, and has paid all taxes due pursuant to such returns, if any, or pursuant to any assessment received by the Borrower, except for any taxes or assessments which are being contested in good faith by appropriate proceedings and with respect thereto adequate reserves have been established in accordance with GAAP and which could otherwise not give rise to a reasonable possibility of a Material Adverse Effect; and the charges, accruals and reserves on the books of the Borrower in respect of taxes or other governmental charges, if any, are, in the opinion of the Borrower, adequate; and (s) the statement of assets and liabilities of the Borrower as at June 18, 1998, certified by Ernst & Young LLP, independent auditors, fairly presents in conformity with GAAP the financial position of the Borrower at such date and since such date there has been no material adverse change in the business, financial condition or results of operations of the Borrower. ARTICLE V COVENANTS SECTION I.22. AFFIRMATIVE COVENANTS OF THE BORROWER. The Borrower covenants and agrees that it shall: (a) (i) duly observe, comply with and conform to all requirements of Applicable Law relative to the conduct of its business or to its Assets, 34 including without limitation the Investment Company Act, to the extent failure to so observe, comply or conform does not give rise to a reasonable possibility of a Material Adverse Effect, (ii) preserve and keep in full force and effect the legal existence of the Borrower and the rights, privileges, qualifications and franchises of the Borrower, and (iii) obtain, maintain and keep in full force and effect all Governmental Authorizations, Private Authorizations and Governmental Filings which are necessary to properly carry out its business and the transactions contemplated to be performed by the Borrower under this Agreement and the other Program Documents; (b) cause to be computed, paid and discharged when due all taxes, assessments and other governmental charges or levies imposed upon it, or upon any income or Assets of the Borrower, prior to the day on which penalties are attached thereto, unless and to the extent that the same shall be contested in good faith by appropriate proceedings and with respect to which adequate reserves have been established on the books of the Borrower in accordance with GAAP and which could not otherwise give rise to a reasonable possibility of a Material Adverse Effect; (c) promptly, at its expense, execute and deliver such further instruments and take such further action in order to establish and protect the rights, interests and remedies created, or intended to be created, in favor of the Secured Parties, including, without limitation, all such actions which are necessary or advisable to maintain and protect the Secured Parties' security interest in the Related Security (other than as to perfection) and the Secured Parties' first priority perfected security interest in the Assigned Collateral; (d) keep its principal place of business and chief executive office at the address of the Borrower set forth in Section 9.02 or, upon thirty (30) days' prior written notice to the Agent, at any other locations in jurisdictions where all actions reasonably requested by the Agent to protect and perfect the Secured Parties' security interest in the Assigned Collateral have been taken and completed; (e) provide to the Agent (with enough additional copies for the Lender and each Secondary Lender): (i) as soon as available, and in any event within seventy-five (75) days after the end of each fiscal year of the Borrower, a statement of assets and liabilities of the Borrower as at the end of such fiscal year, and statements of operations and of changes in net assets of the Borrower for such fiscal year, and a portfolio of investments as of the end of such fiscal year, with an audit report thereon issued by Ernst & Young LLP or other independent auditors of nationally recognized standing, together with the comparable report for the prior fiscal year; (ii) as soon as available, and in any event within seventy-five (75) days after the end of each first semi-annual fiscal period of the Borrower, a statement of assets and liabilities of the Borrower as at the 35 end of such period, a statement of operations and of changes in net assets of the Borrower for such period, and a portfolio of investments as of the end of such period, all certified (subject to normal year-end adjustment) as to fairness of presentation in all material respects by the treasurer, chief financial officer or controller of the Borrower; (iii) simultaneously with the delivery of each set of financial statements referred to in clause (i) above, a statement of the firm of independent auditors which reported on such statements to the effect that nothing has come to its attention to cause it to believe that any Default or Event of Default existed on the date of such statements; (iv) as soon as possible, and in any event within five (5) days of the occurrence of any Default or Event of Default, a certificate of the treasurer, the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (v) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (vi) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual and semi-annual reports which the Borrower shall have filed with the SEC; (vii) on or before Monday of each week, weekly portfolio reports and weekly covenant compliance certificates in substantially the form of Schedule II attached hereto (each a "Weekly Portfolio Report") with respect to the immediately preceding calendar week, signed by an authorized officer of the Borrower; (viii)on or before the tenth (10th) Business Day of each calendar month or more frequently as the Agent shall reasonably request (which may be daily), an Investor Report substantially in the form of Schedule I hereto, together with a certificate of the Borrower in substantially the form of Annex A to the Investor Report; (ix) from time to time upon the request of the Agent, the Borrower shall, or shall cause the Custodian to deliver a report identifying the locations of any Assigned Collateral which is in the possession of or is maintained in securities accounts with an agent or 36 sub-custodian of the Custodian which report shall specify the Assigned Collateral held by each such agent or sub-custodian; (x) promptly upon its receipt of and contemporaneously with its giving of any notice relating to the termination of the Custodial Agreement or the Control Agreement, copies of any such notice; and (xi) from time to time such additional information regarding the financial position or business of the Borrower as the Agent may reasonably request; (f) maintain in force with financially sound and reputable insurers, policies with respect to its assets and property and business against such risks and contingencies and in such amounts as are customary in the case of closed-end funds, engaged in similar lines of business of comparable size and financial strength and as may be required by the SEC; (g) remain at all times a diversified, closed-end investment company for the purposes of the Investment Company Act and continue to engage in business of the same general type as now conducted by the Borrower, and will preserve, renew and keep in full force and effect its corporate existence and rights, privileges and franchises necessary or desirable in the normal conduct of business and will at all times remain registered under the Investment Company Act; (h) annually (or more frequently as the Agent, for itself and as agent for the Secured Parties may require after the occurrence of and during the continuance of a Default or an Event of Default) and at the sole cost and expense of the Borrower (i) cause Ernst & Young LLP, or another independent auditor of nationally recognized standing selected by the Borrower and reasonably satisfactory to the Agent, to enter the premises of the Borrower and any Person to whom the Borrower delegates all or any portion of its duties under any Program Document (including, without limitation, the Custodian) and examine and audit the books, records and accounts of the Borrower relating to its business, financial condition, operations and the Borrower's performance under the Program Documents, (ii) permit such accounting firm to discuss the Borrower's affairs and finances with the officers, partners, employees and accountants of any of them, (iii) cause such auditing firm to provide to the Agent, for itself and as agent for the Secured Parties, with a certified report in respect of the foregoing, which shall be in form and scope reasonably satisfactory to the Agent, for itself and as agent for the Secured Parties, and (iv) authorize such accounting firm to discuss such affairs, finances and performance with representatives of the Agent and its designees; it being understood that such annual audit and report of such independent auditors may be coordinated with the Borrower's regular annual audit by the Borrower's auditors; (i) permit the Agent or any Person designated by the Agent to, upon reasonable advance notice and during normal hours, visit and inspect at 37 reasonable intervals its books, records and accounts relating to its business, financial condition, operations and its performance under the Program Documents and to discuss the foregoing with the officers, partners, employees and accountants of the Borrower, all as often as the Agent may reasonably request. (j) at all times comply with the Borrowing Base Test and the Total Eligible Asset Coverage Test and at all times comply in all material respects with the Investment Policies and Restrictions; (k) the Borrower shall warrant and defend each of the Secured Parties' right and interest in and to the Assigned Collateral and the Related Security against all Adverse Claims of all Persons whomsoever; (l) the Borrower shall at all times cause the Custodian to have and maintain in its custody and control Assigned Collateral in accordance with the terms of the Custodial Agreement and the Control Agreement and shall at all times cause all Eligible Assets of the Borrower to be custodied with the Custodian or a sub-custodian pursuant to the Custodial Agreement; (m) promptly give notice in writing to the Agent of all litigation, arbitration proceedings and regulatory proceedings affecting the Borrower or the Assets of the Borrower, except such proceedings which could not give rise to a reasonable possibility of a Material Adverse Effect; (n) keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities in accordance with the requirements of the SEC; and (o) except as consented to by the Agent (which consent shall not be unreasonably withheld), at all times maintain Mitchell Hutchins Asset Management Inc. as the Borrower's investment adviser; PROVIDED, that the Agent shall in no event be obligated to consent to any change of the Adviser unless such successor investment adviser has entered into a letter agreement with the Agent substantially identical to the Letter Agreement. SECTION I.23. NEGATIVE COVENANTS OF THE BORROWER. The Borrower covenants and agrees that the Borrower shall not: (a) enter into any agreement containing any provision which would be violated or breached by the performance of its obligations under any Program Document; (b) engage in any line of business not contemplated by the Prospectus; 38 (c) create, assume or suffer to exist any Debt, except for Permitted Debt; (d) adopt or carry out any plan of liquidation, partial liquidation, reorganization, incorporation, recapitalization, merger or consolidation nor sell, transfer or otherwise dispose of all or any substantial portion of its assets, without the prior written consent of the Agent; (e) make any (i) payment to any Person except to the extent such payment is made pursuant to the terms of the Program Documents or such payment is made in the ordinary course of the Borrower's business, or (ii) advance or other extension of credit to any Person, except as expressly contemplated by the Investment Policies and Restrictions; (f) permit or consent to a change of the Custodian or cancel or terminate the Custodial Agreement or the Control Agreement, or request, consent or agree to any such cancellation or termination except with the prior written consent of the Agent (which consent shall not be unreasonably withheld); (g) without the prior written consent of the Agent (which consent shall not be unreasonably withheld), permit or consent to any material amendment, modification or waiver of the Custodial Agreement; (h) without the prior written consent of the Agent (which consent shall not be unreasonably withheld), take any action inconsistent in any material respect with the Investment Policies and Restrictions; (i) be a member of an ERISA Group or have any Benefit Arrangement, Plan or Multiemployer Plan subject to ERISA; (j) permit any change in the Investment Policies and Restrictions in effect on the Closing Date without the prior written consent of the Agent (which consent shall not be unreasonably withheld); (k) create, assume or suffer to exist any Lien on any Asset now owned or hereafter acquired by it (including without limitation the Assigned Collateral and the Related Security), except in the case of all Assets other than the Assigned Collateral and the Related Security, for Permitted Liens or any Liens incurred in the ordinary course of the Borrower's business arising out of reverse repurchase agreements, dollar rolls, Derivative Transactions and securities lending transactions; (l) issue any Equity Securities constituting "senior securities", as such term is defined and used in the Investment Company Act; 39 (m) extend credit to others for the purpose of buying or carrying any "margin stock" in such a manner as to violate Regulation T, Regulation U or Regulation X; (n) make any distributions, dividends or other payments on account of its capital stock to, redemptions and open-market stock repurchases of, or tender offers for, its capital stock from, its shareholders: (i) during the continuance of any Event of Default; (ii) at any time that Borrower is not in compliance with the Total Eligible Asset Coverage Test; or (iii) if any Default or Event of Default would be caused thereby; (o) change its name (i) without giving the Agent at least thirty (30) days prior written notice, and (ii) unless all actions necessary and appropriate to protect and perfect the Secured Parties' security interest in the Assigned Collateral have been taken and completed; (p) permit the Aggregate Custodian's Advance Amount to at any time exceed $40,000,000; (q) after the Borrower has received written notice of delivery by the Agent to the Custodian of a Notice of Exclusive Control, unless such Notice of Exclusive Control is revoked in writing by the Agent, give any instruction to the Custodian in respect of the Assigned Collateral without the prior written consent of the Agent; or (r) permit the aggregate Asset Value of all Eligible Collateral that does not constitute "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System to be less than Credits Outstanding. ARTICLE VI EVENTS OF DEFAULT SECTION I.24. EVENTS OF DEFAULT. If any of the following events (each an "Event of Default") shall occur: (a) the Borrower shall fail to comply with Section 2.05(b) or Section 2.05(c); (b) the Borrower shall fail to make or cause to be made in the manner and when due any payment (other than any payment contemplated by clauses (b) or (c) of Section 2.05)to be made or to be caused to be made by it under this Agreement, any Advance Note, the Fee Letter, the Control Agreement or the Custodial Agreement and such failure shall continue for five (5) Business Days; or 40 (c) the Borrower shall fail to comply with (i) clause (k) of Section 5.02 and such failure shall continue for two (2) Business Days, or (ii) clauses (g) or (o) of Section 5.01 or clauses (c), (d), (e), (f), (g), (j) or (l) of Section 5.02; or (d) (i) the Borrower shall fail to perform or observe any other term, covenant or agreement on its part to be performed or observed under this Agreement, Fee Letter or any other Program Document, (ii) the Custodian shall fail to perform or observe any term, covenant or agreement on its part to be performed or observed under the Control Agreement, or (iii) the Custodian shall fail to perform or observe any term, covenant or agreement on its part to be performed under the Custodial Agreement and such failure either (A) gives rise to a Material Adverse Effect, or (B)(x) is of a material nature, (y) the Borrower has actual knowledge of such failure, and (z) such failure is capable of being cured and is not cured, and such failure described in clauses (i), (ii) or (iii) above shall continue for ten (10) Business Days; or (e) any representation or warranty made or deemed made by the Borrower or the Custodian under or in connection with this Agreement or any other Program Document or any other certificate, information or report delivered by or on behalf of the Borrower or the Custodian shall be deemed to have been false or incorrect in any material respect when made or deemed made or delivered; or (f) the Agent shall for any reason cease to have a valid and perfected first priority security interest in the Assigned Collateral free and clear of all Adverse Claims; or (g) the Borrower, the Adviser or the Custodian shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower, the Adviser or the Custodian seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of thirty (30) days, or any of the actions sought in such proceeding (including an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower, the Adviser or the Custodian shall take any corporate action to authorize any of the actions set forth above in this subsection; or (h) as of the end of any calendar month after the Closing Date, the Net Asset Value of the Borrower shall have decreased by twenty-five percent 41 (25%) or more from the Net Asset Value of the Borrower as of the end of the immediately preceding calendar month; or (i) any provision of any Program Document which is material to the Secured Parties' right to repayment of the Borrower Obligations and their remedies in respect thereof shall cease to be a legal, valid and binding obligation of any of the parties purported to be bound thereby, enforceable in accordance with its respective terms or the Borrower, the Adviser or the Custodian shall so assert in writing; or (j) any judgment or order, or any series of judgments or orders, shall have been entered against the Borrower, provided that (i) such judgments or orders shall aggregate to $1,000,000 or more, and (ii) enforcement actions have been commenced with respect thereto and have not been dismissed for ten (10) Business Days; or (k) either (1) State Street Bank and Trust Company shall at any time cease to serve as Custodian under the Custodial Agreement or the Control Agreement, unless a successor thereto reasonably satisfactory to the Agent shall have assumed the duties of the Custodian thereunder and in accordance with the terms of the Program Documents, or (2) the Custodian or the Borrower shall have given notice of the termination of the Custodial Agreement or the Control Agreement; PROVIDED, HOWEVER, that such event specified in clause (2) above shall not constitute an Event of Default if prior to the fifth (5th) Business Day immediately preceding the effective date of such termination a successor custodian reasonably satisfactory to the Agent shall have been appointed as custodian under the Custodial Agreement and shall have assumed the obligations of the Custodian under the Control Agreement; or (l) any event or condition shall occur which results in the acceleration of the maturity of any Debt of the Borrower which Debt in the aggregate is at least $1,000,000 or enables (or, with the giving of notice or lapse of time or both would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; or (m) any change in Law shall be proposed by an Authority with jurisdiction to enact or promulgate the same or shall be enacted or promulgated which could significantly limit the ability of the Agent, or any Secured Party to foreclose upon its interest in, or in the event of such foreclosure to dispose of, the Assigned Collateral or to be granted the security interest in Assigned Collateral as contemplated by the Program Documents; or (n) all of the following occur: (i) the Adviser shall sell or otherwise dispose of all or substantially all of its assets, or consolidate with or merge into any other entity unless it is the survivor (each, an "Adviser Transfer"); (ii) such Adviser Transfer shall result in a change in the then current portfolio manager for the Borrower; and (iii) the Agent shall not have 42 consented to such Adviser Transfer within one hundred twenty (120) days following the date of such Adviser Transfer; or (o) the Advisory Agreement in effect on the Closing Date shall be (i) amended, waived or otherwise modified in any material respect, or (ii) shall be terminated in either case without the prior written consent of the Agent (which consent shall not be unreasonably withheld); (p) if Mitchell Hutchins Asset Management Inc. is not the current investment adviser for the Borrower, there shall not be in full force and effect a letter agreement substantially identical to the Letter Agreement between the Agent and such successor investment adviser; then, and in any such event, in addition to all rights and remedies specified in this Agreement, including without limitation, Article VII, and the rights and remedies of a secured party under Applicable Law including, without limitation the UCC, the Agent may, by notice to the Borrower, declare the Lender Termination Date and the Secondary Lender Termination Date to have occurred and declare the outstanding Advances to be due and payable (in which case the Lender Termination Date, the Secondary Lender Termination Date and the Maturity Date shall be deemed to have occurred); PROVIDED, that, upon the occurrence of any event (without any requirement for the passage of time or the giving of notice, or both) described in subsection (g) of this Section 6.01, the Lender Termination Date, the Secondary Lender Termination Date and the Maturity Date shall be deemed to have automatically occurred. ARTICLE VII PLEDGE OF ASSIGNED COLLATERAL; RIGHTS OF THE AGENT SECTION I.25. SECURITY INTERESTS. As collateral security for the prompt, complete and unconditional payment and performance of all of the Borrower Obligations, the Borrower hereby pledges, hypothecates, assigns, transfers, sets over and delivers to the Agent for the benefit of the Secured Parties and grants to the Agent for the benefit of the Secured Parties a continuing Lien upon and security interest in, all of the Borrower's right, title and interest in, to and under the following assets and properties whether now owned or hereafter acquired (the items specified in clauses (i), (ii), (iii) and (vii) below, collectively, the "Assigned Collateral", and the items specified in clauses (iv), (v) and (vi) below, collectively, the "Related Security"): (i) all investment property from time to time credited to the Collateral Account including all security entitlements with respect thereto; 43 (ii) the Collateral Account; (iii) all interest, dividends, stock dividends, stock splits, distributions and other money or property of any kind distributed in respect of the assets, investments and property described in clause (i) above; (iv) all rights and remedies of the Borrower under the Custodial Agreement in respect of the assets, investments and property described in clause (i) above; (v) all security interests, liens, property, guaranties, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of the assets, investments and property described in clause (i) above; (vi) all books, records and other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) relating to the Assets described in clause (i) above; and (vii) all Proceeds of any and all of the foregoing. SECTION I.26. SUBSTITUTION OF COLLATERAL AND RELEASE OF SECURITY INTEREST. (a) So long as no Default or Event of Default shall have occurred and be continuing or would occur as a consequence of such sale or disposition, the Borrower may originate entitlement orders with respect to the Collateral Account and may sell or dispose of or substitute Assigned Collateral in accordance with the terms of this Agreement and the Control Agreement. (b) After the Lender Termination Date and the Secondary Lender Termination Date when all Borrower Obligations have been paid in full, the Secured Parties at the request of the Borrower shall promptly and in any event within twenty (20) days after such request execute, deliver and file such instruments as the Borrower shall reasonably request in order to reassign, release or terminate its security interest in the Assigned Collateral. Any and all actions under this Section 7.02 shall be without any recourse to, or representation or warranty by, the Agent or any Secured Party (except for a representation that such Assigned Collateral is free and clear of Liens created by or arising through the Secured Parties) and shall be at the sole cost and expense of the Borrower. 44 SECTION I.27. APPLICATION OF PROCEEDS. (a) After the occurrence of an Event of Default, all amounts received in respect of the Borrower Obligations, including all Proceeds resulting from the sale or other disposition of the Assigned Collateral or the Related Security shall be applied by the Agent in the following order and priority: FIRST, to the payment of all amounts advanced or expended by the Agent and all costs and expenses incurred by the Agent in connection with the enforcement of the Secured Parties rights and remedies under the Program Documents; SECOND, to the extent funds are remaining after the above application, to the Lenders and the Secondary Lenders to the payment of all accrued and unpaid Yield on all outstanding Advances on a pro-rata basis according to the amount of accrued Yield owing to each Lender and Secondary Lender; THIRD, to the extent funds are remaining after the above applications, to the Secured Parties to the payment of all fees payable under the Fee Letter on a pro rata basis according to the amount of such fees owing to each Secured Party; FOURTH, to the extent funds are remaining after the above applications, to the Lenders and the Secondary Lenders to the payment of the principal amount of each outstanding Advance on a pro-rata basis according to the amount of principal owing to each Lender and Secondary Lender; FIFTH, to the extent funds are remaining after the above applications, to the Secured Parties to the payment of all other amounts payable to the Secured Parties pursuant to this Agreement and the other Program Documents on a pro rata basis according to the amounts owed to each Secured Party. The Agent shall, after the final payment in full of all Advances and all other Borrower Obligations, remit the remaining excess Proceeds which it had received from the sale or disposition of the Assigned Collateral and the Related Security to the Borrower. (b) For purposes of determining the application to be made of such monies andother cash proceeds by the Agent to the Lender and the Secondary Lenders pursuant to this Section 7.03, the Agent may rely exclusively upon a certificate or other statement the Lender or such Secondary Lender, as the case may be, setting forth in reasonable detail the Lender's and such Secondary Lender's amount then owing to the Lender and such Secondary Lender, as the case may be. The Agent shall not be liable for any application of funds in accordance with any certificate or direction delivered pursuant to this Section 7.03; PROVIDED, HOWEVER, that no application of funds in accordance with any certificate delivered pursuant to this Section 7.03 shall be deemed to restrict 45 or limit the right of any party to contest with the purported obligee its respective liability in respect of the amount set forth in such certificate. SECTION I.28. RIGHTS AND REMEDIES UPON EVENT OF DEFAULT. (a) The Agent (for itself and on behalf of the other Secured Parties) shall have all of the rights and remedies of a secured party under the UCC and other Applicable Law. Upon the occurrence and during the continuance of an Event of Default, the Agent or its designees may (i) deliver a Notice of Exclusive Control to the Custodian; (ii) instruct the Custodian to deliver any or all of the Assigned Collateral to the Agent or its designees and otherwise give all instructions and entitlement orders to the Custodian regarding the Assigned Collateral; (iii) sell or otherwise dispose of the Assigned Collateral, all without judicial process or proceedings; (iv) take control of the Proceeds of any such Assigned Collateral and the Related Security; (v) exercise any consensual or voting rights in respect of the Assigned Collateral and the Related Security; (vi) release, make extensions, discharges, exchanges or substitutions for, or surrender all or any part of the Assigned Collateral or the Related Security; (vii) to the extent that the Borrower does not perform its obligations under Section 7.06, enforce the Borrower's rights and remedies under the Custodial Agreement with respect to the Assigned Collateral and the Related Security; (viii) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Assigned Collateral and the Related Security; and/or (ix) endorse the name of the Borrower upon any items of payment relating to the Assigned Collateral and the Related Security or upon any proof of claim in bankruptcy against an account debtor. For purposes of taking the actions described in Subsections (i) through (ix) of this Section 7.04(a) the Borrower hereby irrevocably appoints the Agent as its attorney-in-fact (which appointment being coupled with an interest is irrevocable while any of the Borrower Obligations remain unpaid), with power of substitution, in the name of the Agent or in the name of the Borrower or otherwise, for the use and benefit of the Agent, but at the cost and expense of the Borrower and without notice to the Borrower. (b) All sums paid or advanced by the Agent in connection with the foregoing and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection therewith, together with interest thereon at the Post-Default Rate from the date of payment until repaid in full, shall be paid by the Borrower to the Agent on demand and shall constitute and become a part of the Borrower Obligations secured hereby. SECTION I.29. REMEDIES CUMULATIVE. Each right, power, and remedy of the Agent and the other Secured Parties, or any of them, as provided for in this Agreement or in the other Program Documents or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Agreement or in the other Program Documents or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Agent 46 or any other Secured Party of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by such Persons of any or all such other rights, powers, or remedies. SECTION I.30. ENFORCEMENT OF REMEDIES UNDER THE CUSTODIAL AGREEMENT. The Borrower agrees that it shall upon the request of the Agent (and at the Borrower's own expense) diligently enforce the rights and remedies under the Custodial Agreement and at law or equity against the Custodian for the breach by the Custodian of any term, covenant or agreement thereunder relating to or affecting any Assigned Collateral or any Related Security. In enforcing such rights and remedies the Borrower shall exercise the same degree and care that it would exercise if this Agreement had not been entered into; PROVIDED, that the Borrower shall not, in enforcing such rights and remedies, settle any claim against the Custodian without the prior written consent of the Agent (which consent shall not be unreasonably withheld). ARTICLE VIII THE AGENT SECTION I.31. AUTHORIZATION AND ACTION. The Lender and each of the Secondary Lenders hereby irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Program Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or the other Program Documents, the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Lender or the Secondary Lenders; PROVIDED, HOWEVER, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement, the other Program Documents or Applicable Law. The Lender and each Secondary Lender agrees that in any instance in which the Program Documents provide that the Agent's consent may not be unreasonably withheld, provide for the exercise of the Agent's reasonable discretion, or provide to a similar effect, it shall not in its instructions to the Agent withhold its consent or exercise its discretion in an unreasonable manner. SECTION I.32. AGENT'S RELIANCE, ETC. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or any of the other Program Documents, except for its or their own gross negligence or willful misconduct. 47 Without limiting the generality of the foregoing, the Agent: (i) may consult with legal counsel (including counsel for the Borrower or the Adviser and independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to the Lender or any Secondary Lender and shall not be responsible to the Lender or any Secondary Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement or the other Program Documents; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Program Documents on the part of the Borrower, the Adviser, the Custodian or any other Person or to inspect the property (including the books and records) of the Borrower or the Adviser; (iv) shall not be responsible to the Lender or any Secondary Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the other Program Documents or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of this Agreement or any other Program Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. ARTICLE IX MISCELLANEOUS SECTION I.33. NO WAIVER; MODIFICATIONS IN WRITING. No failure or delay on the part of the Agent, the Lender or any Secondary Lender exercising any right, power or remedy hereunder or with respect to the Advances shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Lender or any Secondary Lender, at law or in equity. No amendment, modification, supplement, termination or waiver of this Agreement shall be effective unless the same shall be in writing and signed by the Borrower, the Agent, the Lender and the Secondary Lenders. Any waiver of any provision of this Agreement, and any consent to any departure by the Borrower from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 48 SECTION I.34. NOTICES, ETC. Except where telephonic instructions are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by registered, certified or express mail, postage prepaid, or by prepaid telegram (with messenger delivery specified in the case of a telegram), or by facsimile transmission, or by prepaid courier service, and shall be deemed to be given for purposes of this Agreement on the day that such writing is received by the intended recipient thereof in accordance with the provisions of this Section 9.02. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this Section 9.02, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective facsimile numbers) indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party below: If to the Lender: Corporate Receivables Corporation c/o Citicorp North America, Inc. 450 Mamaroneck Avenue Harrison, New York 10528 Attention: U.S. Securitization Telephone No. (914)899-7122 Facsimile No. (914)899-7890 If to the Agent: Citicorp North America, Inc. U.S. Securitization 450 Mamaroneck Avenue Harrison, New York 10528 Attention: U.S. Securitization Telephone No. (914) 899-7122 Facsimile No. (914) 899-7890 If to Citibank: Citibank, N.A. 399 Park Avenue New York, New York 10043 Attention: Maximization Unit Telephone No.: (212) 559-0754 Facsimile No.: (212) 758-6272 If to the Borrower: Managed High Yield Plus Fund Inc. 1285 Avenue of the Americas New York, New York 10019 Attention: Paul H. Schubert, Treasurer Telephone No.: (212) 713-3041 Facsimile No.: (212) 713-9991 49 With a copy to: Mitchell Hutchins Asset Management Inc. 1285 Avenue of the Americas New York, New York 10019 Attention: Dianne E. O'Donnell, Senior Vice President Telephone No.: (212) 713-2712 Facsimile No.: (212) 713-1374 SECTION I.35. TAXES. (a) Any and all payments by the Borrower under this Agreement, the Advance Notes or any other Program Document shall be made, in accordance with this Agreement, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Secured Parties, (i) United States federal withholding taxes and (ii) income and franchise taxes imposed on it by any taxing Authority in any jurisdiction which asserts jurisdiction to impose such taxes on the basis of contacts which the Secured Party in question maintains with such jurisdiction other than contacts arising out of the execution, delivery or performance of the Program Documents or the transactions contemplated thereby (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder, under any Advance Note or under any other Program Document to any Secured Party, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 9.03) such Secured Party receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with Applicable Law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made by the Borrower hereunder, under the Advance Notes or under any other Program Document or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Advance Note or under any other Program Document (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify the Secured Party for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 9.03) paid by any Secured Party in respect of the Borrower and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within thirty (30) days from the date the Secured Party makes written demand therefor to the Borrower. 50 (d) Within thirty (30) days after the date of any payment of Taxes or Other Taxes, the Borrower will furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreement and obligations of the Borrower contained in this Section 9.03 shall survive the payment in full of principal and Yield hereunder and under the Advance Notes. SECTION I.36. COSTS AND EXPENSES; INDEMNIFICATION. (a) The Borrower agrees to promptly pay on demand all costs and expenses of each of the Agent, CRC and Citibank in connection with the preparation, review, negotiation, reproduction, execution, delivery, administration, modification and amendment of this Agreement, the Advance Notes or any other Program Document, including, without limitation, the reasonable fees and disbursements of counsel for the Agent, CRC and Citibank with respect thereto and with respect to advising the Agent, CRC and Citibank as to its rights, remedies and responsibilities under this Agreement and the other Program Documents, UCC filing fees and any periodic auditing expenses; PROVIDED, HOWEVER, that, with respect to the fees of counsel to the Agent, CRC and Citibank in connection with services rendered by such counsel on or prior to the Closing Date, the Borrower shall only be responsible for such counsel fees to the extent such fees do not exceed $75,000 plus all reasonable out-of-pocket costs and expenses. The Borrower further agrees to pay on demand all costs and expenses of the Secured Parties (including, without limitation, the fees and disbursements of counsel), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Advance Notes and the other Program Documents. (b) The Borrower agrees to indemnify and hold harmless each Secured Party and each of their Affiliates and the respective officers, directors, employees, agents, managers of, and any Person controlling any of the foregoing (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, obligations, expenses, penalties, actions, suits, judgments and disbursements of any kind or nature whatsoever, (including, without limitation, the reasonable fees and disbursements of counsel) (collectively the "Liabilities") that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of the execution, delivery, enforcement, performance, administration of or otherwise arising out of or incurred in connection with this Agreement or any other Program Document or any transaction contemplated hereby or thereby (and regardless of whether or not any such transactions are consummated), including, without limitation any such Liability that is incurred or arises out of or in connection with, or by reason of any one or more of the following: (i) preparation for a defense of, any investigation, litigation or proceeding arising out of, related to or in connection with this Agreement or any other Program Document or any of the transactions contemplated hereby or thereby; (ii) 51 any breach or alleged breach of any covenant by the Borrower or the Custodian contained in any Program Document; (iii) any representation or warranty made or deemed made by the Borrower or the Custodian contained in any Program Document or in any certificate, statement or report delivered in connection therewith is, or is alleged to be, false or misleading; (iv) any failure by the Borrower or the Custodian to comply with any Applicable Law or contractual obligation binding upon it; (v) any failure to vest in the Secured Parties a first priority perfected security interest in all of the Assigned Collateral; (vi) any action or omission, not expressly authorized by the Program Documents, by the Borrower, the Adviser or the Custodian, which has the effect of reducing or impairing the Assigned Collateral, any of the Related Security or the rights of the Agent or the Secured Parties with respect thereto; (vii) any Default or Event of Default; and (viii) any transactions related to the funding, carrying or repayment of the outstanding principal amount of the Advances in connection with the Program Documents; EXCEPT to the extent any such Liability is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. SECTION I.37. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. SECTION I.38. ASSIGNABILITY. (a) This Agreement and the Lender's rights and obligations herein (including the outstanding Advances) shall be assignable by the Lender and its successors and assigns; PROVIDED, that without the prior written consent of the Borrower (which consent shall not be unreasonably withheld) the Lender shall not assign its rights and obligations to any Person other than to a U.S. Affiliate of the Agent or pursuant to the Asset Purchase Agreement. Each such assignor shall notify the Agent and the Borrower of any such assignment. Each such assignor may, in connection with the assignment or participation, disclose to the assignee or participant any information relating to the Borrower, including the Assigned Collateral, furnished to such assignor by or on behalf of the Borrower or by the Agent; PROVIDED that, prior to any such disclosure, the assignee or participant agrees to preserve the confidentiality of any confidential information relating to the Borrower received by it from any of the foregoing entities. (b) Each Secondary Lender may, with the consent of the Borrower (which consent shall not be unreasonably withheld or delayed), assign to any Eligible Assignee or to any other Secondary Lender all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Secondary Lender Commitment and the outstanding Advances or interests therein owned by it). The parties to each such assignment shall 52 execute and deliver to the Agent an Assignment and Acceptance. In addition, Citibank or any of its Affiliates may assign any of its rights (including, without limitation, rights to payment of principal and Yield on the Advances) under this Agreement to any Federal Reserve Bank without notice to or consent of the Borrower or the Agent. (c) This Agreement and the rights and obligations of the Agent herein shall be assignable by the Agent and its successors and assigns; PROVIDED, that without the prior written consent of the Borrower (which consent shall not be unreasonably withheld) the Agent shall not assign its obligations to any Person other than a U.S. Affiliate of the Agent. (d) The Borrower may not assign its rights or obligations hereunder or any interest herein without the prior written consent of the Agent. (e) The Borrower acknowledges and agrees that the Secondary Lender's source of funds may derive in part from its participants. Accordingly, references in Sections 2.06, 2.07, 2.08, 2.09, 9.03 and 9.04 and the other terms and provisions of this Agreement and the other Program Documents to rates, determinations, reserve and capital adequacy requirements, expenses, increased costs, reduced receipts and the like as they pertain to the Secondary Lenders shall be deemed also to include those of each of its participants; PROVIDED, that the Borrower shall not be required to reimburse a participant of a Secondary Lender pursuant to Sections 2.06, 2.07, 2.08, 2.09, 9.03 and 9.04 in an amount in excess of the amount that would have been payable to such Secondary Lender had such participation not been made. SECTION I.39. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE. SECTION I.40. SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION I.41. CONFIDENTIALITY. (a) The Borrower agrees that it shall and shall cause each of its Affiliates (i) to keep this Agreement and the other Program Documents, the proposal relating to the structure of the facility contemplated by this Agreement and the other Program Documents (the "Facility"), any analyses, 53 computer models, information or document prepared by the Agent, Citibank or any of their respective Affiliates in connection with the Facility, the Agent's or its Affiliate's written reports to the Borrower, the Adviser or any of their respective Affiliates and any related written information (collectively, the "Product Information") confidential and to disclose Product Information only to those of its officers, employees, agents, accountants, legal counsel and other representatives (collectively, the "Borrower Representatives") who have a need to know such Product Information for the purpose of assisting in the negotiation, completion and administration of the Facility; (ii) to use the Product Information only in connection with the Facility and not for any other purpose; and (iii) to cause the Borrower Representatives to comply with the provisions of this Section 9.09 and to be responsible for any failure of any Borrower Representative to so comply. The provisions of this Section 9.09(a) shall not apply to any Product Information that is a matter of general public knowledge or that has heretofore been made available to the public by any Person other than the Borrower, the Adviser, any of their respective Affiliates or any Borrower Representative or that is required to be disclosed by Applicable Law or is requested by any Authority with jurisdiction over the Borrower, the Adviser or any of their respective Affiliates. (b) Each of the Secured Parties agrees (i) to keep all non-public information with respect to the Borrower and the Adviser and their respective Affiliates which such Secured Party receives pursuant to the Program Documents (collectively, the "Borrower Information") confidential and to disclose Borrower Information only to those of its officers, employees, agents, accountants, legal counsel and other representatives of the Secured Parties (collectively, the "Secured Party Representatives") and to S&P, and Moody's which, in each case, may have a need to know or review such Borrower Information for the purpose of assisting in the negotiation, completion, administration and evaluation of the Facility; (ii) to use the Borrower Information only in connection with the Facility and not for any other purpose; and (iii) to cause its related Secured Party Representatives to comply with the provisions of this Section 9.09(b). The provisions of this Section 9.09(b) shall not apply to any Borrower Information that is a matter of general public knowledge or that has heretofore been made available to the public by any Person other than such Secured Party Representative or that is required to be disclosed by Applicable Law or is requested by any Authority with jurisdiction over any Secured Party or Secured Party Representative or any of its Affiliates. Notwithstanding the foregoing, the Borrower Information may be disclosed by any Secured Party Entity to permitted assignees and participants and potential assignees and participants in the Facility to the extent such disclosure is made pursuant to a written agreement of confidentiality substantially similar to this Section 9.09(b). 54 SECTION I.42. MERGER. The Program Documents taken as a whole incorporate the entire agreement between the parties thereto concerning the subject matter thereof. The Program Documents supersede any prior agreements among the parties relating to the subject matter thereof. SECTION I.43. NO PROCEEDINGS. Each of the Borrower, the Agent, the Secondary Lenders, each assignee of any Advance or any interest therein and each entity which enters into a commitment to make Advances to the Borrower hereunder hereby agrees that it will not institute against CRC any proceeding of the type referred to in Section 6.01(g) so long as any commercial paper or other senior indebtedness issued by CRC shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such commercial paper or other senior indebtedness shall have been outstanding. SECTION I.44. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representation and warranties made hereunder, in the other Program Documents and in any document, certificate or statement delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery of this Agreement and the making of the Advances hereunder. SECTION I.45. SUBMISSION TO JURISDICTION; WAIVERS. The Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement or the other Program Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and the appellate courts of any of them; (b) consents that any such action or proceeding may be brought in any of such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 9.02 or at such other address as may be permitted thereunder; 55 (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction or court; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages, unless such liability arises from the gross negligence or willful misconduct of the Person against whom the claim is asserted. SECTION I.46. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER PROGRAM DOCUMENT OR FOR ANY COUNTERCLAIM THEREIN OR RELATING THERETO. 56 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CORPORATE RECEIVABLES CORPORATION, as Lender By: Citicorp North America, Inc., its Managing Agent By:/s/ Marc B. Adelman ---------------------------------------- Name: Marc B. Adelman Title: Vice President CITICORP NORTH AMERICA, INC., as Agent By:/s/ Marc B. Adelman ---------------------------------------- Name: Marc B. Adelman Title: Vice President CITIBANK, N.A., as Secondary Lender By:/s/ Marc B. Adelman ---------------------------------------- Name: Marc B. Adelman Title: Authorized Signatory Percentage: 100% MANAGED HIGH YIELD PLUS FUND INC., as Borrower By:/s/ Paul Schubert ---------------------------------------- Name: Paul Schubert Title: Vice President and Treasurer SCHEDULE III APPROVED ASSETS (i) Cash and cash equivalents, including certificates of deposit, bankers' acceptances and other bank obligations, commercial paper, money market mutual funds and other, comparable short-term debt instruments and securities; (ii) Bonds, debentures, notes, Eligible Loans and securities, issued by U.S. or foreign, private or governmental or other public issuers, whether denominated in U.S. dollars or in foreign or multi-national currencies, and whether sold at a discount or bearing interest payable in cash or in additional securities; (iii) Common and preferred stocks and securities that are convertible into or may be exchanged for them, whether or not attached to or part of units with debt obligations, issued by U.S. or foreign issuers and whether denominated in U.S. dollars or in foreign or multi-national currencies; (iv) Mortgage-backed and asset-backed securities; and (v) Repurchase agreements. EXHIBIT A [FORM OF ADVANCE NOTE] $------------ ------,---- FOR VALUE RECEIVED, on the Maturity Date (as defined in the Advance Agreement hereinafter referred to) of each Advance made by the [INSERT NAME OF LENDER OR SECONDARY LENDER] (together with its successors and permitted assigns the ["Lender"] ["Secondary Lender"]) to the undersigned (the "Borrower") pursuant to the Credit Agreement (defined below), the Borrower hereby promises to pay to the [Lender] [Secondary Lender] the unpaid principal amount of each such Advance, in immediately available funds and in lawful money of the United States of America, and to pay Yield on the unpaid balance of said principal amount from the Borrowing Date thereof, until the principal amount thereof shall have been paid in full, in like funds and money, as provided in said Credit Agreement for Advances made by the [Lender] [Secondary Lender]. Capitalized terms used in this promissory note unless otherwise defined herein shall have the meaning assigned to such terms in the Credit Agreement. This promissory note is an Advance Note referred to in the Revolving Credit and Security Agreement dated as of October 23, 1998 (as from time to time amended, the "Credit Agreement") among the Borrower, [the Lender] [Secondary Lender], the other banks and financial institutions parties thereto and Citicorp North America, Inc., as agent. The date and principal amount of each Advance made to the Borrower and of each repayment of principal thereon shall be recorded by the [Lender] [Secondary Lender] or its designee on Schedule I attached to this Advance Note, and the aggregate unpaid principal amount shown on such schedule shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Advances made by the [Lender] [Secondary Lender]. The failure to record or any error in recording any such amount on such schedule shall not, however, limit or otherwise affect the obligations of the Borrower hereunder or under the Credit Agreement to repay the principal amount of the Advances together with all Yield accrued thereon. THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. MANAGED HIGH YIELD PLUS FUND INC. By: ___________________________ Name: Title: SCHEDULE I TO EXHIBIT A This Advance Note evidences Advances made by [INSERT NAME OF LENDER OR SECONDARY LENDER], (the ["Lender"] ["Secondary Lender"]) under the Revolving Credit and Security Agreement dated as of October 23, 1998 among Managed High Yield Plus Fund Inc., the [Lender] [Secondary Lender], the other banks and financial institutions parties thereto and Citicorp North America, Inc., as agent in the principal amounts and on the dates set forth below, subject to the payments and prepayments of principal set forth below: PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT AMOUNT PAID BALANCE NOTATION DATE ADVANCED OR PREPAID OUTSTANDING BY - ---- -------- ----------- ----------- -------- EXHIBIT B --------- MANAGED HIGH YIELD PLUS FUND INC. [ADDRESS] Citicorp North America, Inc., as Agent [ADDRESS] NOTICE OF BORROWING ------------------- This Notice of Borrowing is made pursuant to Section 2.02 of that certain Revolving Credit and Security Agreement dated as of October 23, 1998, among CORPORATE RECEIVABLES CORPORATION, as lender (the "Lender"), CITIBANK, N.A. the other banks parties thereto, CITICORP NORTH AMERICA, INC., as agent and MANAGED HIGH YIELD PLUS FUND INC., as borrower (the "Borrower") (as the same may from time to time be amended, supplemented, waived or modified, the "Credit Agreement"). Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to those terms in the Credit Agreement. 1. The Borrower hereby requests that on (the "Borrowing Date") it receive an advance under the Credit Agreement in the principal amount of _____________Dollars ($_____). 2. The Borrower hereby gives notice of its request for such Advance to the Agent pursuant to Section 2.02 of the Credit Agreement and requests the Lender or the Secondary Lenders to remit, or cause to be remitted, the proceeds thereof to [the Borrower's Account] [SPECIFY OTHER ACCOUNT, IF APPLICABLE]. 3. The Borrower certifies that (i) the representations and warranties of the Borrower contained or reaffirmed in Section 4.01 of the Credit Agreement are true and correct in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof (except to the extent such representations and warranties expressly relate to any earlier date); (ii) no Default or Event of Default has occurred and is continuing under the Credit Agreement or will result from the proposed borrowing; (iii) the Borrower has performed in all material respects all agreements and satisfied all conditions under the Credit Agreement to be performed by it on or before the date hereof, (iv) the conditions precedent to the making of the proposed Advance set forth in Article III of the Credit Agreement have been fully satisfied and (v) immediately after giving effect to such advance the Borrowing Base Test and the Total Eligible Asset Test will be complied with. I WITNESS my hand on this ____ day of ___________, ____. MANAGED HIGH YIELD PLUS FUND INC., By: __________________________ Name: Title: EXHIBIT C --------- ASSIGNMENT AND ACCEPTANCE Reference is made to the Revolving Credit and Security Agreement dated as of October 23, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among CORPORATE RECEIVABLES CORPORATION (together with its successors and assigns, the "Lender"), CITIBANK, N.A. (Citibank, N.A., together with the other banks and financial institutions from time to time parties to the Credit Agreement, the "Secondary Lenders"), CITICORP NORTH AMERICA, INC., as agent for the under and the Secondary Lenders (in such capacity, together with its successors and assigns, the "Agent") and MANAGED HIGH YIELD PLUS FUND INC. (together with its permitted successors and assigns, the "Borrower"). Terms defined in the Credit Agreement are used herein with the same meaning. The "Assignor" and the "Assignee" referred to on Schedule I hereto agree as follows: 1. As of the Effective Date (as defined below), the Assignor hereby absolutely and unconditionally sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse to or representation of any kind (except as set forth below) from Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement and under the other Program Documents equal to the percentage interest specified on Schedule I hereto, including the Assignor's Secondary Lender Commitment and Percentage and the Assignor's portion of the outstanding principal amount of the Advances (such rights and obligations assigned hereby being the "Assigned Interests"). After giving effect to such sale, assignment and assumption, the Assignee's "Secondary Lender Commitment" and the Assignee's "Percentage" will be as set forth on Schedule I hereto. 2. The Assignor (i) represents and warrants that immediately prior to the Effective Date it is the legal and beneficial owner of the Assigned Interest free and clear of any Adverse Claim created by the Assignor; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Program Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security or ownership interest created or purported to be created under or in connection with, the Program Documents or any other instrument or document furnished pursuant thereto or the condition or value of the Assigned Interest, Assigned Collateral, Related Security or any interest therein; and (iii) makes no representation or warranty and assumes no responsibility with respect to the condition (financial or otherwise) of any of the Borrower, the Agent, the Custodian, the Adviser or any other person, or the performance or observance by any Person of any of its obligations under any Program Document or any instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement and the other Program Documents, together with copies of any financial statements delivered pursuant to Sections 5.01 of the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor, the Lender or any other Secondary Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under or in connection with any of the Program Documents; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Program Documents as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Program Documents are required to be performed by it as a Secondary Lender; (vi) confirms that the assignment hereunder complies with any applicable legal requirements including the Securities Act of 1933, as amended; (vii) confirms that such Assignee is a United States Person (as defined in Section 7701 (a)(30) of the Internal Revenue Code) or that such Assignee shall have provided the Agent with two Internal Revenue Service forms 4224 (or a successor form) certifying that the income from the Assigned Interest is effectively connected with the conduct of such Person's trade or business in the United States; and (viii) confirms that such Assignee is not a partnership, grantor trust or S corporation (as such terms are defined in the Internal Revenue Code). 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording by the Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the Agent, unless a later effective date is specified on Schedule I hereto. 5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to and bound by the provisions of the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Secondary Lender thereunder and under any other Program Document and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement and under any other Program Document. 6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement in respect of the Assigned Interest to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Assigned Interests for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule I to this Assignment and Acceptance by telecopier shall be effective as a delivery of a manually executed counterpart of this Assignment and Acceptance. IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule I to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon. Schedule I Percentage interest transferred by Assignor: ____% Assignee's "Secondary Lender Commitment": $____ Assignee's "Percentage" ____% Assignor: [INSERT NAME OF ASSIGNOR], as Assignor, By: ___________________________ Authorized Signatory, Assignee: [INSERT NAME OF ASSIGNEE] as Assignee By: ___________________________ Authorized Signatory Accepted, Consented to and Acknowledged this ___ day of - ---------------------, ----- CITICORP NORTH AMERICA, INC., as Agent By: _____________________________ Authorized Signatory MANAGED HIGH YIELD PLUS FUND INC. By: _____________________________ Authorized Signatory EX-99.13(C) 11 Exhibit No. 13(c) AGREEMENT OF AMENDMENT ---------------------- Dated as of October 13, 1999 Reference is made to that certain Revolving Credit and Security Agreement dated as of October 23, 1998 (the "Credit Agreement") among Managed High Yield Plus Fund Inc. (the "Borrower"), Corporate Receivables Corporation, Citibank, N.A. (the "Secondary Lender") and Citicorp North America, Inc., as agent (the "Agent"). Capitalized terms used and not defined herein shall have the meanings assigned to them in the Credit Agreement. The parties hereto agree that, effective as of the date hereof, the definition of the term "Secondary Lender Stated Expiration Date" set forth in Section 1.01 of the Credit Agreement is hereby amended by replacing the date "October 22, 1999" set forth therein with the date "October 20, 2000". This Agreement of Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. THIS AGREEMENT OF AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed and delivered by their duly authorized officers as of the date first above written. CITICORP NORTH AMERICA, INC., CITIBANK, N.A. as Agent as Secondary Lender By: /s/ Marc B. Adelman By: /s/ Marc B. Adelman ----------------------------- ----------------------- Name: MARC B. ADELMAN Name: MARC B. ADELMAN Title: VICE PRESIDENT Title: VICE PRESIDENT CORPORATE RECEIVABLES CORPORATION MANAGED HIGH YIELD PLUS FUND INC., By: Citicorp North America, Inc., as Borrower its Managing Agent By: /s/ Marc B. Adelman By: /s/ Paul Schubert ----------------------------- --------------------- Name: MARC B. ADELMAN Name: PAUL SCHUBERT Title: Vice President Title: Vice President & Treasurer EX-99.14 12 EXHIBIT 14 ERNST & YOUNG LLP - ------------------------------------------------------------------------------ CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Other Service Providers", "Financial Highlights" and "Experts" in the Combined Proxy Statement and Prospectus and "Custodian and Independent Auditors" in the Statement of Additional Information and to the incorporation by reference of our reports dated September 20, 1999 with respect to Managed High Yield Fund, Inc. and July 22, 1999 with respect to Managed High Yield Plus Fund, Inc., in this Registration Statement on Form N-14 of Managed High Yield Plus Fund, Inc. /s/ Ernst & Young LLP --------------------------------- ERNST & YOUNG LLP New York, New York February 15, 2000 -----END PRIVACY-ENHANCED MESSAGE-----