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 Managed  High Yield Fund Inc.  ("High  Yield
Fund") in  exchange  solely for shares of Plus Fund and the  assumption  by Plus
Fund of all 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 March 31,  2000,  relating to  the  above-referenced
matter. A copy of the Proxy  Statement/Prospectus may be obtained without charge
by calling toll-free 1-800-852-4750. This Statement of Additional Information is
dated March 31, 2000.


                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Investment Objectives and Policies.............................................2
Hedging and Other Strategies Using Derivative Instruments.....................20
Directors and Officers........................................................29
Control Persons and Principal Holders of Securities...........................29
Investment Advisory Arrangements..............................................30
Custodian and Independent Auditors............................................31
Portfolio Transactions........................................................31
Net Asset Value of Shares.....................................................33
Taxation......................................................................34
Additional Information........................................................37
Ratings Information...........................................................37
Appendix A: PRO FORMA Financial Statements...................................A-1





      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

         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 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 Fund
shares.

         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.  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 the
Fund has acquired the security.  Also,  Rating  Agencies may fail to make timely
changes in credit ratings in response to subsequent  events.  Consequently,  the
rating  assigned to any particular  security is not  necessarily a reflection of
the issuer's current financial condition,  which may be better or worse than the
rating would indicate. The rating assigned to a security by 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.

      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 the 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  include,  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.

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.


                                       24


OPTIONS

      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.


                                       27


FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS

      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               $104,650
   Richard R. Burt, Director          $1,297               $102,850
   Meyer Feldberg, Director           $1,816               $119,650
   George W. Gowen, Director          $1,327               $119,650
   Frederic Malek, Director           $1,327               $104,650
   Carl W. Schafer, Director          $1,327               $104,650


                                       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 March 1, 2000,  Cede & Co.  (the  nominee for The  Depository  Trust
Company) owned of record 31,577,290  shares or 99.1% 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  March 1,  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
stockholders;  (14)  costs of  mailing  prospectuses  and  supplements  thereto,
statements of additional information and supplements thereto,  reports and proxy
materials to existing  stockholders;  (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  stockholders)  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 stockholders,  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  stockholder 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.

      The Fund, its investment  adviser and its principal  underwriter each have
adopted  a code of  ethics  under  rule  17j-1 of the 1940  Act,  which  permits
personnel  covered by the rule to invest in securities  that may be purchased or
held by the Fund but prohibits fraudulent,  deceptive or manipulative conduct in
connection with that personal investing.

      For the  fiscal  period  ended May 31,  1999,  the Fund paid or accrued to
Mitchell Hutchins  investment  advisory and administration fees totaling $3,433,
461.

                       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 period 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 period ended May 31, 1999, Mitchell Hutchins did not direct
any brokerage  commissions to brokers chosen because they provided  research and
analysis.  For the fiscal period ended May 31, 1999, Plus Fund 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  the  Fund's  annual  sales  or  purchases  of  portfolio  securities
(exclusive of purchases or sales of securities  whose  maturities at the time of
acquisition were one year or less) by the monthly average value of the long-term
securities in the portfolio during the year.


                            NET ASSET VALUE OF SHARES

      The net asset value of the Fund's  shares is determined as of the close of
regular trading on the New York Stock  Exchange   ("NYSE") on each Business Day,
which is defined as each Monday through Friday 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 daily 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.  By  qualifying as a RIC, the
Fund (but not its  stockholders)  will be relieved of federal  income tax on the
part of its investment  company  taxable income and net capital gain (I.E.,  the
excess of net long-term  capital gain over net short-term  capital loss) that it
distributes  to  stockholders.  If the Fund failed to qualify for treatment as a
RIC for any taxable year,  (a) it would be taxed as an ordinary  corporation  on
the full amount of its taxable income for that year without being able to deduct
the  distributions it makes to its  stockholders and (b) the stockholders  would
treat all those distributions,  including  distributions of net capital gain, as
dividends  (that is,  ordinary  income) to the extent of the Fund's earnings and
profits. In addition,  the Fund could be required to recognize unrealized gains,
pay substantial taxes and interest,  and make substantial  distributions  before
requalifying for RIC treatment.

      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.

      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 (with certain  exceptions) 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 the  qualified
electing fund does not  distribute  those earnings and gain to the 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 (and under  regulations  proposed in 1992 that  provided a
similar  election  with  respect  to the stock of  certain  PFICs).  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.  The foregoing  will not
apply, however, to the Fund's transaction during any taxable year that otherwise
would be treated as a constructive  sale if the  transaction is closed within 30
days  after the end of that year and the Fund  holds the  appreciated  financial
position  unhedged for 60 days after that closing (I.E.,  at no time during that
60-day  period is the Fund's risk of loss  regarding  that  position  reduced by
reason of certain specified  transactions with respect to substantially  similar
or  related  property,  such as having an  option to sell,  being  contractually
obligated  to  sell,   making  a  short  sale  or  granting  an  option  to  buy
substantially identical stock or securities).

                             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  Fund's shares  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


                                                        APPENDIX A
- ------------------------------------------------------------------------------------------------------------------------------------

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

                                                                 A-1


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

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
                                                                                        --------------------------------------------
                                                                 A-2

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

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
                                                                                       --------------------------------------------
                                                                 A-3

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

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

                                                                 A-4


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

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
                                                                                        --------------------------------------------
                                                                 A-5

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

PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 2000 (UNAUDITED)

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


                                       A-6




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

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



                                       A-7




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

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


                                       A-8


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 may 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.


                                       A-9


  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.


                                      A-10