-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OV99L7fMig6cWvE/U9nV1k9o6SxR+eFxAcUXzwpcKMaRYcleQ3RzKlb9+gQDJ6Lo OyLOMs2H+eUcYuomL+rpZA== 0000912057-02-030257.txt : 20020807 0000912057-02-030257.hdr.sgml : 20020807 20020807143314 ACCESSION NUMBER: 0000912057-02-030257 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020531 FILED AS OF DATE: 20020807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANAGED HIGH YIELD PLUS FUND INC CENTRAL INDEX KEY: 0001060392 STATE OF INCORPORATION: MD FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-08765 FILM NUMBER: 02721661 BUSINESS ADDRESS: STREET 1: C/O UBS GLOBAL ASSET MANAGEMENT (US) INC STREET 2: 51 WEST 52ND ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 212 882 5575 MAIL ADDRESS: STREET 1: 51 WEST 52ND ST STREET 2: C/O UBS GLOBAL ASSET MANAGEMENT (US) INC CITY: NEW YORK STATE: NY ZIP: 10019 N-30D 1 a2083361zn-30d.txt N-30D [Logo--Three keys design for UBS Global Asset Management] MANAGED HIGH YIELD PLUS FUND INC. ANNUAL REPORT MAY 31, 2002 MANAGED HIGH YIELD PLUS FUND INC. DEAR SHAREHOLDER, We present you with the annual report for the Managed High Yield Plus Fund Inc. for the fiscal year ended May 31, 2002. A NEW GLOBAL BRAND Effective April 8, 2002, Brinson Advisors, Inc. changed its name to UBS Global Asset Management (US) Inc., a member of the UBS Global Asset Management division of UBS AG, one of the largest financial services firms in the world. This strategic branding move reflects the global integration and scope of the organization's investment approach and offerings. The UBS Global Asset Management organization strives to deliver superior investment performance to clients through the management and allocation of their investments across and within all major asset classes. Our strength lies in our globally integrated investment platform. With investment professionals throughout the world, the UBS Global Asset Management organization provides clients with uncommon research, asset allocation and risk management conducted on a fully global basis. We seek to maximize the benefits to clients, through understanding and acting upon their risk and return objectives. This covenant with our clients is the basis for the success of our business. Effective on the same date, the funds comprising the Brinson Mutual Fund Family were renamed UBS Funds. The Funds' investment objectives and investment processes remain the same. MARKET REVIEW Despite mounting evidence of an economic recovery and low inflation, the nation's equity markets continued a downward spiral in 2002 after a brief rally, as corporate accounting irregularities and missed earnings wreaked havoc on investors' confidence. Coinciding with the volatility in equities, the high-yield debt sector endured a wild ride during the fiscal year ended May 31, 2002 and ended the period down sharply. While investor confidence was not strong, consumer buying seemed to support the economic recovery. Retail sales rose 1.1% in May, an increase that was [SIDENOTE] MANAGED HIGH YIELD PLUS FUND INC. INVESTMENT GOALS: Primarily, high income; secondarily, capital appreciation. PORTFOLIO MANAGER/SUBADVISOR: Marianne Rossi UBS Global Asset Management (New York) Inc. COMMENCEMENT: June 26, 1998 NYSE SYMBOL: HYF DIVIDEND PAYMENTS: Monthly 1 duplicated post-period in June. Gross domestic product was surprisingly strong at 6.1% during the first quarter, while interest rates remained at historic lows throughout the second half of the fiscal year. Business activity, although spotty, also increased during the period. The Institute of Supply Management's index hit 55.7 in May, the fourth straight month of readings above 50, signifying expansion. With good news, however, came bad, as unemployment remained high throughout the period, hovering at 6% in April, its highest level since 1994. Late in the period and post-period, the dollar fell sharply against the euro, creating concerns that foreign investors would pull their money out of U.S. stock markets and drive market indices to lows not seen since 1997. Foremost among investor concerns was believability, as at least two dozen name-brand companies were either indicted for various business irregularities or subject to regulatory inquiries. The high-yield sector was not immune to these many pressures during the fiscal year. Poised to rally after a disappointing summer, high-yields suffered sharply after the September 11 terrorists attacks. During the fourth quarter 2001 and into early 2002, the high-yield market rallied, only to be battered down again by peripheral developments, this time by the build-up of corporate accounting scandals in the second quarter of 2002. Toward period's end, a glut of investment-grade new issues put additional price pressure on high-yield debt and caused an outflow of money from these funds. PERFORMANCE AND PORTFOLIO REVIEW AVERAGE ANNUAL RETURNS, PERIODS ENDED 5/31/02
NET ASSET VALUE RETURNS+ FUND LIPPER MEDIAN* - ----------------------------------------------------------------------------- 6 Months (4.01%) 2.63% 1 Year (15.17) (3.66) Inception# (13.02) (4.03) MARKET PRICE RETURNS+ FUND LIPPER MEDIAN* - ----------------------------------------------------------------------------- 6 Months (3.36%) 4.76% 1 Year (13.22) 3.86 Inception# (10.46) (0.04)
+ Past performance is no guarantee of future results. The Fund's share price and investment return will vary so that an investor's shares may be worth more or less than their original cost. NAV and market price returns for periods of one year or less are cumulative. NAV return assumes, for illustration only, that dividends were reinvested at the net asset value on the payable dates. Returns do not reflect any commissions and are not representative of the performance of an individual investment. * Lipper High Current Yield Funds (Leveraged) Median. Lipper Peer Group data calculated by Lipper, Inc.; used with permission. Lipper total return methodology compares a fund's NAV (or market price in the case of market price returns) at the beginning and end of a period, with the result being expressed as a percent change of the beginning net asset value (or market price). The net asset value (or market price) is adjusted to reflect the compounding effect of reinvesting income dividends as well as capital gains distributions, if any. Distributions are reinvested on the ex-dividend date at the ex-dividend NAV (or market price on the pay date). Lipper total returns do not reflect any commissions. The Lipper Median is the return of the fund that places in the middle of the peer group. # The Fund's inception is June 26, 1998. Inception returns for the Lipper Median are shown as of next month-end: June 30, 1998. 2 SHARE PRICE AND DIVIDEND, 5/31/02 Net Asset Value $4.98 Market Price $5.64 12-Month Dividend $0.980 Dividend at Period-End $0.065
PORTFOLIO HIGHLIGHTS The UBS Managed High Yield Plus Fund underperformed during the fiscal year ended May 31, 2002, producing a negative net asset value return of 15.17%. In contrast, the Lipper High Current Yield Funds (Leveraged) Median returned -3.66% on a net asset value basis. Although the Fund's performance was negative, returns were not as poor during the second half of the fiscal year, posting a negative 4.01% net asset value return. Continuing a restructuring that began with the Fund's portfolio management change 18 months ago, we continued to more broadly diversify the Fund's holdings. Six new credits entered the Fund's top ten holdings during the fiscal year: Blount, Four M, Nexstar Finance, Levi Strauss, Advance Stores and Charter Communications. Credit quality declined slightly during the fiscal year. As a glut of relatively expensive BB-and-higher-rated issues came onto the market, the percentage of this debt in the Fund dropped from 19.9% to 9.2%. However, the percentage of B-rated credit in the Fund increased from 62.9% to 66.3%. PORTFOLIO STATISTICS
CREDIT QUALITY** 5/31/02 11/30/01 Cash 1.1% 0.3% BB & Higher 9.2 15.3 B 66.3 63.5 CCC & Lower 20.8 18.4 Equity/Preferred 2.6 2.5 Total 100.0% 100.0%
CHARACTERISTICS** 5/31/02 11/30/01 Weighted Avg. Maturity 6.9 yrs 6.8 yrs Weighted Avg. Price $89.94 $86.74 Leverage 31.9% 28.8% Net Assets ($mm) $200.8 $223.4
** Weightings represent percentages of portfolio assets as of the dates indicated. The Fund's portfolio is actively managed and its composition will vary over time. 3
TOP TEN HOLDINGS* 5/31/02 11/30/01 - -------------------------------------------------------------------------------- PTC International Finance 2.9% Allied Waste North America 3.5% Blount 2.8 Crown Castle International 3.1 Triad Hospitals 2.8 AES 2.8 Allied Waste North America 2.8 Triad Hospitals 2.5 Four M Corp. 2.6 PTC International Finance 2.5 Crown Castle International 2.6 Nextel Communications 2.3 Nexstar Finance LLC 2.5 Park Place Entertainment 2.3 Levi Strauss & Co. 2.3 Sinclair Broadcast Group 2.3 Advance Stores Co. 2.3 Alamosa Delaware 2.3 Charter Communications 2.2 Adelphia Communications 2.3 Total 25.8% Total 25.9% - -------------------------------------------------------------------------------- TOP FIVE SECTORS* 5/31/02 11/30/01 - -------------------------------------------------------------------------------- Wireless Telecommunications 15.6% Wireless Telecommunications 16.6% Gaming 14.0 Gaming 11.0 Cable 8.0 Cable 10.7 Broadcast 7.9 Broadcast 8.1 Healthcare Facilities/Supplies 6.9 Broadband 6.4 Total 52.4% Total 52.8% - --------------------------------------------------------------------------------
* Weightings represent percentages of net assets as of May 31, 2002. The Fund's portfolio is actively managed and its composition will vary over time. 4 OUTLOOK With the federal government now running at a deficit, the dollar expected to fall further against the euro, and geopolitical uncertainty abroad and at home remaining a threat to the market, the high-yield market is collectively holding its breath for a sustained economic recovery. We believe the high-yield sector will land on better footing if the recovery is sustained, leading investors to once again be willing to add an element of risk to their portfolios. Investors' flight-to-quality had produced widening spreads versus both Treasurys and investment-grade corporate bonds. Technical pressures should also ease with a recovery, as new issues become more abundant than during the last few months of the fiscal year. These factors, we believe, will provide opportunities in the high-yield sector. We intend to continue looking for debt from well-managed companies, consistent with the Fund's objectives, and anticipate a revival of the market as businesses get past the recent accounting scandals. Additionally, the Federal Reserve has signalled that it is in no rush to raise its fed funds rate. Our ultimate objective in managing your investments is to help you successfully meet your financial goals. We thank you for your continued support and welcome any comments or questions you may have. For additional information on the UBS Funds,(1) please contact your financial advisor or visit us at www.ubs.com Sincerely, /s/ Brian M. Storms /s/ Marianne Rossi Brian M. Storms Marianne Rossi PRESIDENT PORTFOLIO MANAGER Managed High Yield Plus Fund Inc. Managed High Yield Plus Fund Inc. PRESIDENT AND CHIEF EXECUTIVE OFFICER MANAGING DIRECTOR UBS Global Asset Management UBS Global Asset Management (US) Inc. (New York) Inc. This letter is intended to assist shareholders in understanding how the Fund performed during the fiscal year ended May 31, 2002, and reflects our views at the time of its writing. Of course, these views may change in response to changing circumstances. We encourage you to consult your financial advisor regarding your personal investment program. (1) Mutual funds are sold by prospectus only. The prospectuses for the Funds contain more complete information regarding risks, charges and expenses, and should be read carefully before investing. 5 PORTFOLIO OF INVESTMENTS -- MAY 31, 2002
PRINCIPAL AMOUNT MATURITY INTEREST (000) DATES RATES VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS--137.88% - --------------------------------------------------------------------------------------------------------- AEROSPACE--0.93% $ 2,000 Argo-Tech Corp. 10/01/07 8.625% $ 1,860,000 - --------------------------------------------------------------------------------------------------------- AIRLINE--0.45% 6,420 Airplanes Pass-Through Trust, Series D @ 03/15/19 10.875 898,807 - --------------------------------------------------------------------------------------------------------- APPAREL/TEXTILES--5.07% 4,500 Levi Straus & Co. 01/15/08 11.625 4,680,000 - --------------------------------------------------------------------------------------------------------- 1,250 Perry Ellis International, Inc. ** 03/15/09 9.500 1,262,500 - --------------------------------------------------------------------------------------------------------- 2,000 Tropical Sportswear International Corp., - --------------------------------------------------------------------------------------------------------- Series A 06/15/08 11.000 2,092,500 - --------------------------------------------------------------------------------------------------------- 1,405 Westpoint Stevens, Inc. 06/15/05 7.875 885,150 - --------------------------------------------------------------------------------------------------------- 1,175 William Carter Co., Series B 08/15/11 10.875 1,269,000 - --------------------------------------------------------------------------------------------------------- 10,189,150 - --------------------------------------------------------------------------------------------------------- AUTO MANUFACTURING/SUPPLIERS--4.44% 1,250 Collins & Aikman Products Co. ** 12/31/11 10.750 1,307,812 - --------------------------------------------------------------------------------------------------------- 2,100 Collins & Aikman Products Co. 04/15/06 11.500 2,110,500 - --------------------------------------------------------------------------------------------------------- 2,605 Delco Remy International, Inc. 08/01/06 to 10.625 to 05/01/09 11.000 2,350,025 - --------------------------------------------------------------------------------------------------------- 2,750 Dura Operating Corp., Series D 05/01/09 9.000 2,770,625 - --------------------------------------------------------------------------------------------------------- 3,500 Hayes Lemmerz International, Inc. (b) 07/15/06 11.000 385,000 - --------------------------------------------------------------------------------------------------------- 8,923,962 - --------------------------------------------------------------------------------------------------------- BROADBAND--1.85% 2,250 Alestra S.A. 05/15/06 12.125 821,250 - --------------------------------------------------------------------------------------------------------- 3,300 Energis PLC (b) 06/15/09 9.750 264,000 - --------------------------------------------------------------------------------------------------------- 4,750 GT Group Telecom, Inc. (b) 02/01/10 13.250+ 190,000 - --------------------------------------------------------------------------------------------------------- 5,000 Level 3 Communications, Inc. 03/15/08 11.000 2,425,000 - --------------------------------------------------------------------------------------------------------- 2,000 World Access, Inc. (b) 01/15/08 13.250 20,000 - --------------------------------------------------------------------------------------------------------- 3,720,250 - --------------------------------------------------------------------------------------------------------- BROADCAST--7.91% 2,000 Cumulus Media, Inc. 07/01/08 10.375 2,150,000 - --------------------------------------------------------------------------------------------------------- 1,000 Granite Broadcasting Corp. 05/15/08 8.875 900,000 - --------------------------------------------------------------------------------------------------------- 1,500 Gray Communications Systems, Inc. ** 12/15/11 9.250 1,563,750 - --------------------------------------------------------------------------------------------------------- 4,600 Nexstar Finance LLC, Inc. 04/01/08 12.000 5,071,500 - --------------------------------------------------------------------------------------------------------- 2,000 Nextmedia Operating, Inc. 07/01/11 10.750 2,117,500 - --------------------------------------------------------------------------------------------------------- 1,000 Paxson Communications Corp. 07/15/08 10.750 1,082,500 - ---------------------------------------------------------------------------------------------------------
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PRINCIPAL AMOUNT MATURITY INTEREST (000) DATES RATES VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS--(CONTINUED) - --------------------------------------------------------------------------------------------------------- BROADCAST--(CONCLUDED) $ 1,000 Sinclair Broadcast Group, Inc. ** 12/15/11 8.750% $ 1,035,000 - --------------------------------------------------------------------------------------------------------- 2,000 Young Broadcasting, Inc. 03/01/11 10.000 1,970,000 - --------------------------------------------------------------------------------------------------------- 15,890,250 - --------------------------------------------------------------------------------------------------------- BUILDING PRODUCTS--3.41% 1,500 Atrium Cos., Inc., Series B 05/01/09 10.500 1,515,000 - --------------------------------------------------------------------------------------------------------- 2,750 Dayton Superior Corp. 06/15/09 13.000 2,777,500 - --------------------------------------------------------------------------------------------------------- 2,500 Nortek, Inc., Series B 06/15/11 9.875 2,562,500 - --------------------------------------------------------------------------------------------------------- 6,855,000 - --------------------------------------------------------------------------------------------------------- CABLE--6.71% 4,500 Adelphia Communications Corp. (b) 10/01/10 10.875 3,262,500 - --------------------------------------------------------------------------------------------------------- 4,750 Callahan Nordrhein-Westfalen 07/15/10 14.000 237,500 - --------------------------------------------------------------------------------------------------------- 5,000 Charter Communications Holdings 10/01/09 to 10.000 to 05/15/11 10.750 4,435,000 - --------------------------------------------------------------------------------------------------------- 2,250 Coaxial Commerce, Inc. 08/15/06 10.000 2,250,000 - --------------------------------------------------------------------------------------------------------- 2,000 Ekabel Hessen GMBH 09/01/10 14.500 520,000 - --------------------------------------------------------------------------------------------------------- 1,500 Olympus Communications LP, Series B (b) 11/15/06 10.625 1,215,000 - --------------------------------------------------------------------------------------------------------- 3,000 Telewest Communications PLC 10/01/07 11.000 1,350,000 - --------------------------------------------------------------------------------------------------------- 5,000 UIH Australia Pacific, Inc. (b) 05/15/06 14.000 200,000 - --------------------------------------------------------------------------------------------------------- 13,470,000 - --------------------------------------------------------------------------------------------------------- CHEMICALS--6.67% 1,500 Acetex Corp. 08/01/09 10.875 1,582,500 - --------------------------------------------------------------------------------------------------------- 2,500 Avecia Group PLC 07/01/09 11.000 2,518,750 - --------------------------------------------------------------------------------------------------------- 2,000 Equistar Chemicals LP 09/01/08 10.125 1,965,000 - --------------------------------------------------------------------------------------------------------- 3,700 Geo Specialty Chemicals, Inc. 08/01/08 10.125 3,135,750 - --------------------------------------------------------------------------------------------------------- 2,875 Huntsman ICI Chemicals LLC, Series B 07/01/09 10.125 2,677,344 - --------------------------------------------------------------------------------------------------------- 1,550 Lyondell Chemical Co., Series B 05/01/07 9.875 1,519,000 - --------------------------------------------------------------------------------------------------------- 13,398,344 - --------------------------------------------------------------------------------------------------------- CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER)--1.36% 8,250 Adelphia Business Solutions, Inc. (b) 11/01/07 12.000 20,625 - --------------------------------------------------------------------------------------------------------- 5,000 Allegiance Telecom, Inc. 05/15/08 12.875 1,100,000 - --------------------------------------------------------------------------------------------------------- 2,250 Colt Telecom Group PLC 12/15/06 12.000 1,327,500 - --------------------------------------------------------------------------------------------------------- 3,000 XO Communications, Inc. (b) 12/15/07 12.750 285,000 - --------------------------------------------------------------------------------------------------------- 2,733,125 - ---------------------------------------------------------------------------------------------------------
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PRINCIPAL AMOUNT MATURITY INTEREST (000) DATES RATES VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS--(CONTINUED) - --------------------------------------------------------------------------------------------------------- CONSUMER PRODUCTS--3.96% - --------------------------------------------------------------------------------------------------------- $ 1,500 Jarden Corp. ** 05/01/12 9.750% $ 1,470,000 - --------------------------------------------------------------------------------------------------------- 3,825 Samsonite Corp. 06/15/08 10.750 3,251,250 - --------------------------------------------------------------------------------------------------------- 3,250 Winsloew Furniture, Inc., Series B 08/15/07 12.750 3,237,813 - --------------------------------------------------------------------------------------------------------- 7,959,063 - --------------------------------------------------------------------------------------------------------- CONTAINERS & PACKAGING--3.79% 5,000 Four M Corp., Series B 06/01/06 12.000 5,150,000 - --------------------------------------------------------------------------------------------------------- 2,250 Owens Brockway Glass Container, Inc. ** 02/15/09 8.875 2,328,750 - --------------------------------------------------------------------------------------------------------- 125 Silgan Holdings, Inc. ** 06/01/09 9.000 130,313 - --------------------------------------------------------------------------------------------------------- 7,609,063 - --------------------------------------------------------------------------------------------------------- ENERGY--0.55% 10,941 Orion Refining Corp. **@ 11/15/04 10.000+ 1,094,051 - --------------------------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES--2.77% 5,500 Allied Waste North America, Inc., Series B 08/01/09 10.000 5,555,000 - --------------------------------------------------------------------------------------------------------- FINANCE - OTHER--0.96% 2,500 Nationwide Credit, Inc., Series A (b) 01/15/08 10.250 625,000 - --------------------------------------------------------------------------------------------------------- 3,500 Ono Finance PLC 05/01/09 13.000 1,295,000 - --------------------------------------------------------------------------------------------------------- 5,550 Superior National Insurance Group @(b)(c) 12/01/17 10.750+ 0 - --------------------------------------------------------------------------------------------------------- 1,920,000 - --------------------------------------------------------------------------------------------------------- FOOD PROCESSORS/BEVERAGE/BOTTLING--4.99% 4,250 B & G Foods, Inc., Series B 08/01/07 9.625 4,382,812 - --------------------------------------------------------------------------------------------------------- 4,000 Luigino's, Inc. 02/01/06 10.000 4,090,000 - --------------------------------------------------------------------------------------------------------- 1,500 National Wine & Spirits 01/15/09 10.125 1,548,750 - --------------------------------------------------------------------------------------------------------- 10,021,562 - --------------------------------------------------------------------------------------------------------- GAMING--13.97% 4,125 Alliance Gaming Corp., Series B 08/01/07 10.000 4,331,250 - --------------------------------------------------------------------------------------------------------- 1,500 Ameristar Casinos, Inc. 02/15/09 10.750 1,650,000 - --------------------------------------------------------------------------------------------------------- 2,000 Herbst Gaming, Inc., Series B 09/01/08 10.750 2,140,000 - --------------------------------------------------------------------------------------------------------- 2,000 Hollywood Casino Corp. 05/01/07 11.250 2,200,000 - --------------------------------------------------------------------------------------------------------- 2,500 Jacobs Entertainment Co. ** 02/01/09 11.875 2,637,500 - --------------------------------------------------------------------------------------------------------- 2,750 Majestic Investor Holdings LLC ** 11/30/07 11.653 2,640,000 - --------------------------------------------------------------------------------------------------------- 3,920 Majestic Star Casino LLC, Series B 07/01/06 10.875 4,076,800 - --------------------------------------------------------------------------------------------------------- 3,150 MGM Mirage, Inc. 06/01/07 9.750 3,390,187 - --------------------------------------------------------------------------------------------------------- 1,750 Penn National Gaming, Inc., Series B 03/01/08 11.125 1,890,000 - ---------------------------------------------------------------------------------------------------------
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PRINCIPAL AMOUNT MATURITY INTEREST (000) DATES RATES VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS--(CONTINUED) - --------------------------------------------------------------------------------------------------------- GAMING--(CONCLUDED) $ 2,000 Venetian Casino Resort LLC ** 06/15/10 11.000% $ 2,062,500 - --------------------------------------------------------------------------------------------------------- 1,000 Wheeling Island Gaming, Inc. ** 12/15/09 10.125 1,047,500 - --------------------------------------------------------------------------------------------------------- 28,065,737 - --------------------------------------------------------------------------------------------------------- HEALTHCARE FACILITIES/SUPPLIES--6.94% - --------------------------------------------------------------------------------------------------------- 2,250 Extendicare Health Services, Inc. 12/15/07 9.350 2,160,000 - --------------------------------------------------------------------------------------------------------- 2,000 Hanger Orthopedic Group, Inc. 06/15/09 11.250 2,060,000 - --------------------------------------------------------------------------------------------------------- 1,000 Per-Se Technologies, Inc., Series B 02/15/05 9.500 975,000 - --------------------------------------------------------------------------------------------------------- 2,000 Radiologix, Inc., Series B 12/15/08 10.500 2,090,000 - --------------------------------------------------------------------------------------------------------- 5,000 Triad Hospitals Holdings, Inc., Series B 05/15/09 11.000 5,612,500 - --------------------------------------------------------------------------------------------------------- 1,000 Vicar Operating, Inc. ** 12/01/09 9.875 1,050,000 - --------------------------------------------------------------------------------------------------------- 13,947,500 - --------------------------------------------------------------------------------------------------------- INDUSTRIAL-OTHER--5.80% 2,000 Better Minerals & Aggregates Co. 09/15/09 13.000 2,040,000 - --------------------------------------------------------------------------------------------------------- 8,250 Blount, Inc. 08/01/09 13.000 5,620,312 - --------------------------------------------------------------------------------------------------------- 2,100 IPC Acquisition Corp. ** 12/15/09 11.500 2,084,250 - --------------------------------------------------------------------------------------------------------- 2,000 Motors & Gears, Inc., Series D 11/15/06 10.750 1,910,000 - --------------------------------------------------------------------------------------------------------- 11,654,562 - --------------------------------------------------------------------------------------------------------- LEISURE--1.32% 2,700 Affinity Group Holding, Inc. 04/01/07 11.000 2,659,500 - --------------------------------------------------------------------------------------------------------- LODGING--1.57% 3,150 Host Marriott LP, Series E 02/15/06 8.375 3,150,000 - --------------------------------------------------------------------------------------------------------- OIL EQUIPMENT--2.74% 1,973 Key Energy Services, Inc., Series B 01/15/09 14.000 2,268,950 - --------------------------------------------------------------------------------------------------------- 3,000 Pride International, Inc. 06/01/09 10.000 3,240,000 - --------------------------------------------------------------------------------------------------------- 5,508,950 - --------------------------------------------------------------------------------------------------------- OIL & GAS--2.71% 2,750 Belden & Blake Corp., Series B 06/15/07 9.875 2,447,500 - --------------------------------------------------------------------------------------------------------- 1,500 Plains Resources, Inc., Series D 03/15/06 10.250 1,537,500 - --------------------------------------------------------------------------------------------------------- 1,750 Wiser Oil Co. 05/15/07 9.500 1,454,688 - --------------------------------------------------------------------------------------------------------- 5,439,688 - --------------------------------------------------------------------------------------------------------- PAPER & FOREST PRODUCTS--5.92% 3,590 Ainsworth Lumber Ltd. 07/15/07 12.500 to 13.875 3,926,175 - ---------------------------------------------------------------------------------------------------------
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PRINCIPAL AMOUNT MATURITY INTEREST (000) DATES RATES VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS--(CONTINUED) - --------------------------------------------------------------------------------------------------------- PAPER & FOREST PRODUCTS--(CONCLUDED) $ 2,250 Bear Island Paper Co. LLC, Series B 12/01/07 10.000% $ 1,918,125 - --------------------------------------------------------------------------------------------------------- 1,650 Potlatch Corp. 07/15/11 10.000 1,806,750 - --------------------------------------------------------------------------------------------------------- 1,625 Riverwood International Corp. 04/01/08 10.875 1,690,000 - --------------------------------------------------------------------------------------------------------- 2,500 Tembec Industries, Inc. 06/30/09 8.625 2,550,000 - --------------------------------------------------------------------------------------------------------- 11,891,050 - --------------------------------------------------------------------------------------------------------- PUBLISHING--6.50% 6,000 Premier Graphics, Inc. (b) 12/01/05 11.500 180,000 - --------------------------------------------------------------------------------------------------------- 3,000 Primedia, Inc. 06/01/04 10.250 2,625,000 - --------------------------------------------------------------------------------------------------------- 2,325 T/SF Communications Corp., Series B 11/01/07 10.375 2,313,375 - --------------------------------------------------------------------------------------------------------- 2,500 Transwestern Publishing Co. LLC, Series F 11/15/07 9.625 2,625,000 - --------------------------------------------------------------------------------------------------------- 1,000 Von Hoffmann Corp. ** 03/15/09 10.250 1,038,750 - --------------------------------------------------------------------------------------------------------- 2,000 WRC Media, Inc./ Weekly Reader 11/15/09 12.750 2,085,000 - --------------------------------------------------------------------------------------------------------- 2,000 Yell Finance BV 08/01/11 10.750 2,180,000 - --------------------------------------------------------------------------------------------------------- 13,047,125 - --------------------------------------------------------------------------------------------------------- RESTAURANTS--2.66% 4,910 American Restaurant Group, Inc., Series D 11/01/06 11.500 4,320,800 - --------------------------------------------------------------------------------------------------------- 1,000 Sbarro, Inc. 09/15/09 11.000 1,027,500 - --------------------------------------------------------------------------------------------------------- 5,348,300 - --------------------------------------------------------------------------------------------------------- RETAIL--4.60% 4,300 Advance Stores Co., Inc., Series B 04/15/08 10.250 4,568,750 - --------------------------------------------------------------------------------------------------------- 2,000 Office Depot, Inc. 07/15/08 10.000 2,200,000 - --------------------------------------------------------------------------------------------------------- 2,250 PETCO Animal Supplies, Inc. ** 11/01/11 10.750 2,463,750 - --------------------------------------------------------------------------------------------------------- 9,232,500 - --------------------------------------------------------------------------------------------------------- RETAIL (FOOD)--3.61% 1,000 Fleming Cos., Inc. 04/01/08 10.125 1,060,000 - --------------------------------------------------------------------------------------------------------- 1,500 Fleming Cos., Inc. ** 05/01/12 9.875 1,522,500 - --------------------------------------------------------------------------------------------------------- 1,500 Michael Foods, Inc., Series B 04/01/11 11.750 1,653,750 - --------------------------------------------------------------------------------------------------------- 3,275 Pantry, Inc. 10/15/07 10.250 3,013,000 - --------------------------------------------------------------------------------------------------------- 7,249,250 - ---------------------------------------------------------------------------------------------------------
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PRINCIPAL AMOUNT MATURITY INTEREST (000) DATES RATES VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS--(CONTINUED) - --------------------------------------------------------------------------------------------------------- SATELLITE--0.58% $ 5,025 ICG Holdings, Inc. (b) 05/01/06 12.500% $ 201,000 - --------------------------------------------------------------------------------------------------------- 3,000 ICG Services, Inc. (b) 02/15/08 10.000+ 90,000 - --------------------------------------------------------------------------------------------------------- 2,000 Pegasus Communications Corp., Series B 10/15/05 9.625 880,000 - --------------------------------------------------------------------------------------------------------- 1,171,000 - --------------------------------------------------------------------------------------------------------- SERVICE--4.27% 6,995 American Eco Corp., Series B @(b) 05/15/08 9.625+ 699 - --------------------------------------------------------------------------------------------------------- 3,000 Avis Group Holdings, Inc. 05/01/09 11.000 3,330,000 - --------------------------------------------------------------------------------------------------------- 1,963 Interep National Radio Sales, Inc., Series B 07/01/08 10.000 1,727,440 - --------------------------------------------------------------------------------------------------------- 2,800 Key3Media Group, Inc. 06/15/11 11.250 1,456,000 - --------------------------------------------------------------------------------------------------------- 2,250 Mail-Well I Corp., Series B 12/15/08 8.750 2,058,750 - --------------------------------------------------------------------------------------------------------- 8,572,889 - --------------------------------------------------------------------------------------------------------- TECHNOLOGY--1.97% 2,000 Chippac International Ltd., Series B 08/01/09 12.750 2,180,000 - --------------------------------------------------------------------------------------------------------- 1,690 Fairchild Semiconductor Corp. 03/15/07 10.125 1,776,613 - --------------------------------------------------------------------------------------------------------- 4,558 Inter Act Operating Co. @(b)(c) 08/01/03 14.000 0 - --------------------------------------------------------------------------------------------------------- 3,956,613 - --------------------------------------------------------------------------------------------------------- TRANSPORTATION--0.60% 2,000 Laidlaw, Inc. (b) 04/15/25 8.750 1,205,000 - --------------------------------------------------------------------------------------------------------- UTILITY-ELECTRICITY, GAS & OTHER--2.07% 5,250 AES Corp. 06/01/09 9.500 4,147,500 - --------------------------------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATIONS--14.23% 4,850 Alamosa Delaware, Inc. 02/01/11 12.500 4,025,500 - --------------------------------------------------------------------------------------------------------- 2,450 American Tower Corp. 02/01/09 9.375 1,690,500 - --------------------------------------------------------------------------------------------------------- 2,750 Crown Castle International Corp. 08/01/11 9.375 to 10.750 2,310,000 - --------------------------------------------------------------------------------------------------------- 2,000 Dobson Communications Corp. 07/01/10 10.875 1,770,000 - --------------------------------------------------------------------------------------------------------- 2,000 Dobson Sygnet Communications Co. 12/15/08 12.250 1,790,000 - --------------------------------------------------------------------------------------------------------- 2,500 Leap Wireless International, Inc. 04/15/10 12.500 850,000 - --------------------------------------------------------------------------------------------------------- 600 Nextel Communications, Inc. 02/01/11 9.500 379,500 - --------------------------------------------------------------------------------------------------------- 6,500 Nextel Communications, Inc. 02/15/08 9.950+ 3,900,000 - --------------------------------------------------------------------------------------------------------- 5,700 Nextel International, Inc. (b) 08/01/10 12.750 171,000 - --------------------------------------------------------------------------------------------------------- 2,500 Nextel Partners, Inc. 03/15/10 11.000 1,537,500 - --------------------------------------------------------------------------------------------------------- 1,000 Nextel Partners, Inc. ** 11/15/09 12.500 655,000 - --------------------------------------------------------------------------------------------------------- 5,500 PTC International Finance I.I. SA 12/01/09 11.250 5,830,000 - ---------------------------------------------------------------------------------------------------------
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PRINCIPAL AMOUNT MATURITY INTEREST (000) DATES RATES VALUE - --------------------------------------------------------------------------------------------------------- CORPORATE BONDS--(CONCLUDED) - --------------------------------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATIONS--(CONCLUDED) $ 3,000 SBA Communications Corp. 02/01/09 10.250% $ 2,115,000 - --------------------------------------------------------------------------------------------------------- 3,350 Spectrasite Holdings, Inc., Series B 03/15/10 10.750 1,557,750 - --------------------------------------------------------------------------------------------------------- 28,581,750 - --------------------------------------------------------------------------------------------------------- Total Corporate Bonds (cost--$373,902,601) 276,926,541 =========================================================================================================
NUMBER OF SHARES - --------------------------------------------------------------------------------------------------------- COMMON STOCKS (a)--0.76% - --------------------------------------------------------------------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES--0.15% 172,051 RCN Corp. 290,766 - --------------------------------------------------------------------------------------------------------- 88,063 Song Networks Holding AB 22,016 - --------------------------------------------------------------------------------------------------------- 48,600 Viatel, Inc. @(c) 0 - --------------------------------------------------------------------------------------------------------- 312,782 - --------------------------------------------------------------------------------------------------------- ENERGY--0.00% 437,921 Orion Refining Corp. @(c) 0 - --------------------------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES--0.00% 219,599 Waste Systems International, Inc. @(c) 0 - --------------------------------------------------------------------------------------------------------- FOOD PRODUCTS--0.03% 40,949 Packaged Ice, Inc. 55,281 - --------------------------------------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES--0.58% 332,317 Metal Management, Inc. 1,163,110 - --------------------------------------------------------------------------------------------------------- SERVICE--0.00% 98,094 PNV, Inc. 490 - --------------------------------------------------------------------------------------------------------- SPECIALTY RETAIL--0.00% 47,500 Samuels Jewelers, Inc. @(c) 2,779 - --------------------------------------------------------------------------------------------------------- Total Common Stocks (cost--$15,245,044) 1,534,442 ========================================================================================================= PREFERRED STOCKS--2.77% - --------------------------------------------------------------------------------------------------------- CABLE-1.29% 20,000 Adelphia Communications Corp., Series B 340,000 - --------------------------------------------------------------------------------------------------------- 25,000 CSC Holdings, Inc., Series M 2,250,000 - --------------------------------------------------------------------------------------------------------- 2,590,000 - ---------------------------------------------------------------------------------------------------------
12
NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------------- PREFERRED STOCKS--(CONCLUDED) - --------------------------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES--0.00% 2,518 Waste Systems International, Inc., Series E @(a)(c) $ 25 - --------------------------------------------------------------------------------------------------------- RESTAURANTS--0.00% 11 American Restaurant Group, Inc., Series B (a)(c) 0 - --------------------------------------------------------------------------------------------------------- SATELLITE--0.00% 3,049 ICG Holdings, Inc. (a) 3 - --------------------------------------------------------------------------------------------------------- SERVICE--0.07% 492,067 Earthwatch, Inc., Series C ** 123,017 - --------------------------------------------------------------------------------------------------------- TECHNOLOGY--0.00% 6,500 Inter Act Electronic Marketing, Inc. (a) 6,500 - --------------------------------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATIONS--1.41% 5,556 Crown Castle International Corp. 2,833,560 - --------------------------------------------------------------------------------------------------------- Total Preferred Stocks (cost--$16,561,322) 5,553,105 =========================================================================================================
NUMBER OF WARRANTS - --------------------------------------------------------------------------------------------------------- WARRANTS (a)--0.26% - --------------------------------------------------------------------------------------------------------- BROADBAND--0.00% 4,750 GT Group Telecom, Inc. 7,125 - --------------------------------------------------------------------------------------------------------- 4,950 Pathnet, Inc. 49 - --------------------------------------------------------------------------------------------------------- 7,174 - --------------------------------------------------------------------------------------------------------- BUILDING PRODUCTS--0.01% 2,500 Dayton Superior Corp. ** 25,000 - --------------------------------------------------------------------------------------------------------- CABLE--0.00% 3,000 UIH Australia Pacific, Inc. 0 - --------------------------------------------------------------------------------------------------------- CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER)--0.00% 3,000 Knology Holdings, Inc. ** 30 - --------------------------------------------------------------------------------------------------------- COMMUNICATIONS - MOBILE--0.00% 1,750 Nextel International, Inc. 18 - --------------------------------------------------------------------------------------------------------- CONSUMER PRODUCTS-0.02% 3,250 Winsloew Furniture, Inc. 32,906 - ---------------------------------------------------------------------------------------------------------
13
NUMBER OF WARRANTS VALUE - --------------------------------------------------------------------------------------------------------- WARRANTS--(CONCLUDED) FINANCIAL SERVICES--0.00% 750 Arcadia Financial Ltd. $ 0 - --------------------------------------------------------------------------------------------------------- OIL EQUIPMENT--0.23% 4,500 Key Energy Services, Inc. (a) 454,500 - --------------------------------------------------------------------------------------------------------- TECHNOLOGY--0.00% 6,500 Inter Act Electronic Marketing, Inc. @ 65 - --------------------------------------------------------------------------------------------------------- 6,500 Inter Act Systems, Inc. @ 6,500 - --------------------------------------------------------------------------------------------------------- 6,565 - --------------------------------------------------------------------------------------------------------- UTILITY - ELECTRICITY, GAS & OTHER--0.00% 800 Electronic Retailing Systems International, Inc. 8 - --------------------------------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES--0.00% 3,000 Leap Wireless International, Inc. 1,500 - --------------------------------------------------------------------------------------------------------- Total Warrants (cost--$548,745) 527,701 =========================================================================================================
PRINCIPAL AMOUNT MATURITY INTEREST (000) DATE RATE - ----------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT--1.67% - ----------------------------------------------------------------------------------------------------------- $3,349 REpurchase Agreement dated 05/31/02 with State Street Bank & Trust Co., collateralized by $3,448,891 U.S. Treasury Bills, Zero Coupon due 11/29/02; (value--$3,416,127); proceeds: $3,349,474 (cost--$3,349,000) 06/03/02 1.700% 3,349,000 - ----------------------------------------------------------------------------------------------------------- Total Investments (cost--$409,606,712)--143.34% 287,890,789 - ----------------------------------------------------------------------------------------------------------- Liabilities in excess of other assets--(43.34)% (87,047,182) - ----------------------------------------------------------------------------------------------------------- Net Assets--100.00% $200,843,607 - -----------------------------------------------------------------------------------------------------------
@ Illiquid securities representing 1.00% of net assets. + Denotes a step-up bond or zero coupon bond that converts to the noted fixed rate at a designated future date. ** 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 security. (b) Bond interest in default. (c) Security is being fair valued by a valuation committee under the direction of the board of directors. See accompanying notes to financial statements. 14 STATEMENT OF ASSETS AND LIABILITIES -- MAY 31, 2002 ASSETS: Investment in securities, at value (cost--$409,606,712) $287,890,789 - ---------------------------------------------------------------------------------------------------------- Cash 185 - --------------------------------------------------------------------------------------------------------- Interest and dividends receivable 9,684,343 - --------------------------------------------------------------------------------------------------------- Other assets 23,527 - --------------------------------------------------------------------------------------------------------- TOTAL ASSETS 297,598,844 - --------------------------------------------------------------------------------------------------------- LIABILITIES: Bank loan payable 94,250,000 - --------------------------------------------------------------------------------------------------------- Payable for investments purchased 2,020,000 - --------------------------------------------------------------------------------------------------------- Payable for interest on bank loan 193,249 - --------------------------------------------------------------------------------------------------------- Payable to investment manager and administrator 179,295 - --------------------------------------------------------------------------------------------------------- Accrued expenses and other liabilities 112,693 - --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 96,755,237 - --------------------------------------------------------------------------------------------------------- NET ASSETS: Capital stock--$0.001 par value; 200,000,000 shares authorized; 40,356,000 shares issued and outstanding 562,900,677 - --------------------------------------------------------------------------------------------------------- Accumulated net realized loss from investment transactions (240,341,147) - ---------------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments (121,715,923) - ---------------------------------------------------------------------------------------------------------- NET ASSETS $200,843,607 ========================================================================================================== NET ASSET VALUE PER SHARE $4.98 ==========================================================================================================
See accompanying notes to financial statements. 15 STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2002 - --------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest and dividends $44,592,307 - --------------------------------------------------------------------------------------------------------- EXPENSES: Interest expense, loan commitment and other fees 3,155,579 - --------------------------------------------------------------------------------------------------------- Investment management and administration fees 2,252,464 - --------------------------------------------------------------------------------------------------------- Custody and accounting fees 135,135 - --------------------------------------------------------------------------------------------------------- Professional fees 89,392 - --------------------------------------------------------------------------------------------------------- Reports and notices to shareholders 87,257 - --------------------------------------------------------------------------------------------------------- Transfer agency fees 10,351 - --------------------------------------------------------------------------------------------------------- Directors' fees 5,282 - --------------------------------------------------------------------------------------------------------- Other expenses 69,583 - --------------------------------------------------------------------------------------------------------- 5,805,043 - --------------------------------------------------------------------------------------------------------- Net investment income 38,787,264 - --------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES: Net realized loss from investment transactions (69,375,996) - --------------------------------------------------------------------------------------------------------- Net change in unrealized appreciation/depreciation of investments (10,533,469) - --------------------------------------------------------------------------------------------------------- Net realized and unrealized loss from investment activities (79,909,465) ========================================================================================================= Net decrease in net assets resulting from operations $(41,122,201) =========================================================================================================
See accompanying notes to financial statements. 16 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MAY 31, 2002 2001 - --------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 38,787,264 $ 41,345,343 - --------------------------------------------------------------------------------------------------------- Net realized losses from investment transactions (69,375,996) (79,180,247) - ---------------------------------------------------------------------------------------------------------- Net change in unrealized appreciation/depreciation of investments and interest rate swap (10,533,469) (20,846,383) - ---------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from operations (41,122,201) (58,681,287) - ---------------------------------------------------------------------------------------------------------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income (38,575,217) (46,853,019) - ---------------------------------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS: Shares issued in connection with the reorganization involving managed high yield fund inc. -- 57,292,004 - --------------------------------------------------------------------------------------------------------- Proceeds from dividends reinvested 9,717,781 9,050,468 - --------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from capital stock transactions 9,717,781 66,342,472 - --------------------------------------------------------------------------------------------------------- Net decrease in net assets (69,979,637) (39,191,834) - ---------------------------------------------------------------------------------------------------------- NET ASSETS: Beginning of year 270,823,244 310,015,078 - --------------------------------------------------------------------------------------------------------- End of year $200,843,607 $270,823,244 =========================================================================================================
See accompanying notes to financial statements. 17 STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 2002 - --------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES: Interest and dividends received $ 42,048,962 - --------------------------------------------------------------------------------------------------------- Operating expenses paid (2,850,154) - --------------------------------------------------------------------------------------------------------- Interest paid (3,399,837) - --------------------------------------------------------------------------------------------------------- Purchase of short-term portfolio investments, net (3,349,000) - ---------------------------------------------------------------------------------------------------------- Purchase of long-term portfolio investments (126,733,775) - ---------------------------------------------------------------------------------------------------------- Sale of long-term portfolio investments 127,891,425 ========================================================================================================= Net cash provided from operating activities 33,607,621 ========================================================================================================= CASH FLOWS PROVIDED FROM (USED FOR) FINANCING ACTIVITIES: Dividends paid to shareholders (38,575,217) - ---------------------------------------------------------------------------------------------------------- Decrease in bank loan (4,750,000) - ---------------------------------------------------------------------------------------------------------- Proceeds from capital stock transactions 9,717,781 ========================================================================================================= Net cash used for financing activities (33,607,436) ========================================================================================================= Net increase in cash 185 - --------------------------------------------------------------------------------------------------------- Cash at beginning of year 0 ========================================================================================================= Cash at end of year $ 185 - --------------------------------------------------------------------------------------------------------- RECONCILIATION OF NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH PROVIDED FROM OPERATING ACTIVITIES: Net decrease in net assets resulting from operations $ (41,122,201) ========================================================================================================= Decrease in investments, at value 71,114,057 - --------------------------------------------------------------------------------------------------------- Decrease in receivable for investments sold 4,859,303 - --------------------------------------------------------------------------------------------------------- Decrease in interest receivable 1,904,091 - --------------------------------------------------------------------------------------------------------- Increase in other assets (5,992) - ---------------------------------------------------------------------------------------------------------- Decrease in payable for investments purchased (280,366) - ---------------------------------------------------------------------------------------------------------- Decrease in payable to custodian (2,422,315) - ---------------------------------------------------------------------------------------------------------- Decrease in payable for interest on bank loan (244,258) - ---------------------------------------------------------------------------------------------------------- Decrease in payable to investment manager and administrator (100,335) - ---------------------------------------------------------------------------------------------------------- Decrease in accrued expenses and other liabilities (94,363) ========================================================================================================= Total adjustments 74,729,822 ========================================================================================================= Net cash provided from operating activities $ 33,607,621 =========================================================================================================
See accompanying notes to financial statements. 18 NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Managed High Yield Plus Fund Inc. (the "Fund") was incorporated in Maryland on April 24, 1998 and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, as a closed-end diversified management investment company. The Fund's primary investment objective is to seek high income. Its secondary objective is to seek capital appreciation. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires Fund management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies: VALUATION OF INVESTMENTS -- The Fund calculates its net asset value based on the current market value, where available, 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 reported last 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 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 UBS Global Asset Management (US) Inc. ("UBS Global AM", formerly known as Brinson Advisors, Inc.), the investment manager and administrator of the Fund or by the Fund's investment sub-advisor. UBS Global AM is an indirect wholly owned asset management subsidiary of UBS AG. 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 a management committee 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 circum- 19 stances, 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 or advised by UBS Global AM. 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 shareholders are recorded on the ex-dividend date. The amount of dividends from net investment income and distributions is determined in accordance with U.S. federal income tax regulations, which may differ from accounting principles generally accepted in the United States. 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 their federal tax-basis treatment; temporary differences do not require reclassification. BORROWINGS The Fund has a $200 million committed credit facility (the "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 entire amount 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 has pledged assets in the amount of $234,804,996 on May 31, 2002 as collateral for the bank loan. For the year ended May 31, 2002, the Fund borrowed a daily weighted average balance of $96,368,493 at an interest rate of 3.27%. CONCENTRATION OF RISK The ability of the issuers of the debt securities held by the Fund to meet their obligations may be affected by economic developments, including those particular to a specific industry, country or region. In addition, the Fund's use of leverage creates greater volatility in the Fund's net asset value and market price of its shares. INVESTMENT MANAGER AND ADMINISTRATOR, SUB-ADVISOR The Board has approved an investment management and administration contract ("Management Contract") with UBS Global AM, under which UBS Global AM serves as investment manager and administrator of the Fund. In accordance with the Management Contract, the Fund pays UBS Global AM an investment management and administration fee, which is accrued weekly and paid monthly, at 20 the annual rate of 0.70% of the Fund's average weekly total assets minus liabilities other than the aggregate indebtedness constituting leverage. UBS Global AM has entered into a sub-advisory contract ("Sub-Advisory Contract") with UBS Global Asset Management (New York) Inc. (formerly known as Brinson Partners (New York), Inc.) dated February 8, 2001, pursuant to which UBS Global Asset Management (New York) Inc. serves as investment sub-advisor for the Fund. Under the Sub-Advisory Contract, UBS Global AM (not the Fund) is obligated to pay UBS Global Asset Management (New York) Inc. a fee, computed weekly and paid monthly, at the annual rate of 0.2375% of the Fund's average weekly net assets. REORGANIZATION INVOLVING MANAGED HIGH YIELD FUND INC. Effective as of the close of business on June 2, 2000 (the "Reorganization Date"), the Fund acquired all of the assets and assumed all of the liabilities of Managed High Yield Fund Inc. ("Managed High Yield Fund"). The acquisition was accomplished by a tax-free exchange of 5,841,759 shares of the Fund for 6,031,667 shares of the Managed High Yield Fund outstanding on the Reorganization Date. Managed High Yield Fund's net assets at that date, valued at $57,292,004 including net unrealized depreciation of investments of $12,133,299, were combined with those of the Fund. All shares were exchanged at net asset value. Accordingly, no shareholder had any gain or loss as a result of the exchange. The Fund's decrease in net assets resulting from operations in the statement of changes in net assets and financial highlights do not include the operations of Managed High Yield Fund prior to the Reorganization Date. CAPITAL STOCK There are 200,000,000 shares of $0.001 par value capital stock authorized and 40,356,000 shares outstanding at May 31, 2002. Transactions in shares of common stock were as follows:
SHARES AMOUNT - -------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED MAY 31, 2002: Dividends reinvested 1,600,860 $ 9,717,781 - -------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED MAY 31, 2001: Shares issued in connection with the reorganization involving Managed High Yield Fund Inc. 5,841,759 $57,292,004 Dividends reinvested 1,054,753 9,050,468 - -------------------------------------------------------------------------------------------------------- Net increase 6,896,512 $66,342,472 ========================================================================================================
FEDERAL TAX STATUS For federal income tax purposes, at May 31, 2002, the components of net unrealized depreciation of investments were as follows: Gross depreciation (from investments having an excess of cost over value) $(137,086,632) Gross appreciation (from investments having an excess of value over cost) 15,117,251 -------------- Net unrealized depreciation of investments $(121,969,381) ==============
21 For the year ended May 31, 2002, total aggregate purchases and sales of portfolio securities, excluding short-term securities, were $124,031,094 and $123,032,122, respectively. The Fund intends to distribute substantially all of its taxable income and to comply with the other requirements of the Internal Revenue Code applicable to regulated investment companies. Accordingly, no provision for federal income taxes is required. In addition, by distributing during each calendar year substantially all of its net investment income, capital gains and certain other amounts, if any, the Fund intends not to be subject to a federal excise tax. The tax character of distributions paid during the fiscal years ended May 31, 2002 and May 31, 2001 were as follows:
- -------------------------------------------------------------------------------------------------------- DISTRIBUTIONS PAID FROM: 2002 2001 - -------------------------------------------------------------------------------------------------------- Ordinary income $38,575,217 $46,853,019 =========================================================================================================
At May 31, 2002, the components of accumulated deficit on a tax basis were as follows: - -------------------------------------------------------------------------------------------------------- Accumulated capital and other losses $(260,831,495) Unrealized depreciation (121,969,381) - -------------------------------------------------------------------------------------------------------- Total accumulated deficit $(382,800,876) =========================================================================================================
The difference between book-basis and tax-basis unrealized depreciation is attributable to the tax deferral of losses on wash sales and capital losses acquired as a result of the Fund's merger with Managed High Yield Fund on June 2, 2000. At May 31, 2002, the Fund had a net capital loss carryover of $211,521,603. This loss carryforward is available as a reduction, to the extent provided in the regulations, of future net realized capital gains, and will expire as follows: $3,675,851 in 2003; $531,918 in 2004; $1,037,133 in 2005; $13,100,516 in 2007; $50,099,935 in 2008; $71,221,921 in 2009; and $71,854,329 in 2010. The capital loss carryforward includes $20,743,806 of capital losses from the acquisition of Managed High Yield Fund Inc. on June 2, 2000. These losses may be subject to annual limitations pursuant to section 382(b)(1) of the Internal Revenue Code. To the extent that such losses are used to offset future net realized capital gains, it is probable these gains will not be distributed. Also, in accordance with U.S. Treasury regulations, the Fund has elected to defer $49,309,892 of net realized capital losses arising after October 31, 2001. Such losses are treated for tax purposes as arising on June 1, 2002. To reflect reclassifications arising from permanent "book/tax" differences for the year ended May 31, 2002, distributions in excess of net investment income were decreased by $119,946 and capital stock was decreased by $119,946. 22 FINANCIAL HIGHLIGHTS Selected data for a share of common stock outstanding throughout each period is presented below:
FOR THE PERIOD FOR THE YEARS ENDED MAY 31, JUNE 26, 1998+ ------------------------------------- THROUGH 2002 2001 2000 MAY 31, 1999 - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.99 $ 9.73 $ 12.35 $ 15.00 - ------------------------------------------------------------------------------------------------- Net investment income 0.96 1.07 1.48 1.42 - ------------------------------------------------------------------------------------------------- Net realized and unrealized losses from investment transactions (1.99) (2.58) (2.60) (2.83) - ------------------------------------------------------------------------------------------------- Net decrease from investment operations (1.03) (1.51) (1.12) (1.41) - ------------------------------------------------------------------------------------------------- Dividends from net investment income (0.98) (1.23) (1.50) (1.24) - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 4.98 $ 6.99 $ 9.73 $ 12.35 - ------------------------------------------------------------------------------------------------- MARKET VALUE, END OF PERIOD $ 5.64 $ 7.65 $ 9.44 $ 12.31 - ------------------------------------------------------------------------------------------------- TOTAL INVESTMENT RETURN1 (13.22)% (5.55)% (12.14)% (9.37)% - ------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 200,844 $ 270,823 $ 310,015 $ 388,929 - ------------------------------------------------------------------------------------------------- Expenses to average net assets, including interest expense 2.58% 3.11% 3.59% 3.02%* - ------------------------------------------------------------------------------------------------- Expenses to average net assets, excluding interest expense 1.18% 1.07% 1.17% 1.15%* - ------------------------------------------------------------------------------------------------- Net investment income to average net assets 17.22% 13.00% 12.74% 11.82%* - ------------------------------------------------------------------------------------------------- Portfolio turnover rate 40% 54% 66% 52% Asset coverage++ $ 3,131 $ 3,736 $ 3,844 $ 3,682 =================================================================================================
+ Commencement of operations ++ Per $1,000 of bank loans outstanding * Annualized (1) Total investment return is calculated assuming a purchase of common stock at the current market price on the first day of each period reported and a sale at the current market price on the last day of each period reported, and assuming reinvestment of dividends at prices obtained under the Fund's Dividend Reinvestment Plan. Total investment return does not reflect brokerage commissions and has not been annualized for the period less than one year. 23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders of Managed High Yield Plus Fund Inc. We have audited the accompanying statement of assets and liabilities of Managed High Yield Plus Fund Inc. (the "Fund"), including the portfolio of investments, as of May 31, 2002, and the related statements of operations and cash flows for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of investments owned as of May 31, 2002, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Managed High Yield Plus Fund Inc. at May 31, 2002, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for the indicated periods, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York July 9, 2002 24 GENERAL INFORMATION (UNAUDITED) THE FUND Managed High Yield Plus Fund Inc. (the "Fund") is a diversified, closed-end management investment company whose shares trade on the New York Stock Exchange ("NYSE"). The Fund's primary investment objective is to seek high income. Its secondary objective is to seek capital appreciation. The Fund's investment manager and administrator is UBS Global Asset Management (US) Inc. ("UBSGlobal AM"), an indirect wholly-owned asset management subsidiary of UBS AG, which had over $73.6 billion in assets under management as of June 30, 2002. UBS Global AM has entered into a sub-advisory contract with UBS Global Asset Management (New York) Inc. pursuant to which UBS Global Asset Management (New York) Inc. serves as investment sub-advisor for the Fund. INVESTMENT POLICY CHANGES The Fund's board approved modifications to the Fund's investment policies as a result of a new rule promulgated by the Securities and Exchange Commission. This rule generally requires a fund with a name suggesting that it focuses on a particular type of investment to invest at least 80% of its net assets (plus the amount of any borrowing for investment purposes) in the type of investment suggested by its name. The investment policy changes became effective April 8, 2002. These changes are not expected to affect materially portfolio management. The new 80% policy has been adopted as a "non-fundamental" investment policy. This means that this investment policy may be changed by the Fund's board without shareholder approval. However, the Fund has also adopted a policy to provide its shareholders with at least 60 days' prior written notice of any change to its 80% investment policy. Many of the Fund's other investment policies are also non-fundamental policies and may be changed by its board without shareholder approval. The Fund will interpret these new policies as if the following phrase appeared immediately after the words "net assets": "(plus the amount of any borrowing for investment purposes)." If subsequent to an investment, the Fund's 80% policy is no longer met (E.G., bonds are called or mature resulting in a large influx of cash), then under normal circumstances, the Fund's future investments would be made in manner that would bring the Fund's investments back in line with the 80% threshold. In order to place these changes in context, reproduced below are prior policies that were impacted by this change as well as new policies which replace the prior policies: PRIOR POLICIES IMPACTED BY CHANGE: Under normal market conditions, the Fund will invest at least 65% of its total assets in: (i) income-producing debt securities that are rated below investment grade (lower than a Baa rating 25 by Moody's, lower than a BBB rating by S&P or comparably rated by another Rating Agency) or that are unrated and that [the Fund's sub-advisor]... has determined to be of comparable quality; and (ii) equity securities (including common stocks and rights and warrants for equity securities) that are attached to, or are part of a unit including, such debt securities. .... In certain market conditions, [the Fund's sub-advisor]... may determine that securities rated investment grade (I.E., at least Baa by Moody's or BBB by S&P or comparably rated by another Rating Agency) offer significant opportunities for high income and capital appreciation with only a relatively small reduction in yield. In such conditions, the Fund may invest less than 65% of its total assets in lower-rated, income producing debt and related equity securities. .... The Fund also may invest up to 35% of its total assets in investment grade debt securities of private and government issuers, equity securities of lower-rated or comparable issuers (issuers whose debt securities are lower-rated or who [the Fund's sub-advisor]... determines to be of comparable quality), money market instruments and municipal obligations. .... Because the Fund must include the return on zero coupon, [original issue discount]... and [payment-in-kind]... securities as taxable income, the Fund considers these securities to be income-producing for purposes of computing whether at least 65% of the Fund's total assets are invested in lower-rated, income-producing debt and related equity securities. .... When unusual market or economic conditions occur, the Fund may, for temporary defensive purposes, invest up to 100% of its total assets, or for liquidity purposes, invest up to 35% of its total assets, in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, certificates of deposit, bankers' acceptances or other bank obligations, commercial paper or other income strategies deemed by [the Fund's sub-advisor]... to be consistent with a defensive posture, or it may hold cash. These strategies may include an increase in the portion 26 of the Fund's assets invested in higher-quality debt securities, which generally have lower yields than do lower-rated securities. REVISED POLICIES: Under normal circumstances, the Fund invests at least 80% of its net assets in high yield debt securities that are rated below investment grade or considered to be of comparable quality. These investments include income-producing debt securities that are rated below investment grade (I.E., lower than a Baa rating by Moody's, lower than a BBB rating by S&P or comparably rated by another Rating Agency) or that are unrated and that [the Fund's sub-advisor]... has determined to be of comparable quality; equity securities (including common stocks and rights and warrants for equity securities) that are attached to, or are part of a unit including, such debt securities are considered to be part of such high yield debt securities. .... In certain market conditions, [the Fund's sub-advisor]... may determine that securities rated investment grade (I.E., at least Baa by Moody's or BBB by S&P or comparably rated by another Rating Agency) offer significant opportunities for high income and capital appreciation with only a relatively small reduction in yield. In such conditions, the Fund will still invest at least 80% of its net assets as noted above. .... The Fund also may invest up to 20% of its net assets in investment grade debt securities of private and government issuers, equity securities of lower-rated or comparable issuers (issuers whose debt securities are lower-rated or who [the Fund's sub-advisor]... determines to be of comparable quality), money market instruments and municipal obligations. .... Because the Fund must include the return on zero coupon, [original issue discount]... and [payment-in-kind]... securities as taxable income, the Fund considers these securities to be income- producing for purposes of computing whether at least 80% of the Fund's net assets are invested in high yield debt securities that are rated below investment grade. .... 27 When unusual market or economic conditions occur, the Fund may, for temporary defensive purposes, invest up to 100% of its total assets, or for liquidity purposes, invest up to 20% of its net assets, in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, certificates of deposit, bankers' acceptances or other bank obligations, commercial paper or other income strategies deemed by [the Fund's sub-advisor]... to be consistent with a defensive posture, or it may hold cash. These strategies may include an increase in the portion of the Fund's assets Invested in higher-quality debt-securities, which generally have lower yields than do lower-rated securities. SHAREHOLDER INFORMATION The Fund's NYSE trading symbol is "HYF." Comparative net asset value and market price information about the Fund is published weekly in THE WALL STREET JOURNAL, THE NEW YORK TIMES and BARRON'S, as well as in numerous other publications. DIVIDEND REINVESTMENT PLAN The Fund's Board has established a Dividend Reinvestment Plan (the "Plan") under which all shareholders whose shares are registered in their own names, or in the name of UBS PaineWebber Inc. or its nominee, will have all dividends and other distributions on their shares automatically reinvested in additional shares, unless such shareholders elect to receive cash. Shareholders who elect to hold their shares in the name of another broker or nominee should contact such broker or nominee to determine whether, or how, they may participate in the Plan. The ability of such shareholders to participate in the Plan may change if their shares are transferred into the name of another broker or nominee. A shareholder may elect not to participate in the Plan or may terminate participation in the Plan at any time without penalty, and shareholders who have previously terminated participation in the Plan may rejoin it at any time. Changes in elections must be made in writing to the Fund's transfer agent and should include the shareholder's name and address as they appear on that share certificate or in the transfer agent's records. An election to terminate participation in the Plan, until such election is changed, will be deemed an election by a shareholder to take all subsequent distributions in cash. An election will be effective only for distributions declared and having a record date at least ten days after the date on which the election is received. The transfer agent will serve as agent for the shareholders in administering the Plan. After the Fund declares a dividend or determines to make any other distribution, the transfer agent, as agent for the participants, receives the cash payment. Whenever the Fund declares an income dividend or a capital gain distribution (collectively referred to in this section as "dividends") payable either 28 in shares or in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in shares. The transfer agent will acquire shares for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of unissued but authorized shares from the Fund ("newly issued shares") or (ii) by purchase of outstanding shares on the open market, on the NYSE or elsewhere ("open-market purchases"). If, on the dividend payment date, the net asset value per share is equal to or less than the market price per share, plus estimated brokerage commissions (such condition being referred to herein as "market premium"), the transfer agent will invest the dividend amount in newly issued shares on behalf of the participants. The number of newly issued shares to be credited to each participant's account will be determined by dividing the dollar amount of the dividend by the net asset value per share (but in no event less than 95% of the then current market price per share) on the date the shares were issued. If, on the dividend payment date, the net asset value per share is greater than the market value per share, plus estimated brokerage commissions (such condition being referred to herein as "market discount"), the transfer agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases. The number of outstanding shares purchased with each distribution for a particular shareholder equals the result obtained by dividing the amount of the distribution payable to that shareholder by the average price per share (including applicable brokerage commissions) that the transfer agent was able to obtain in the open market. In the event of a market discount on the dividend payment date, the transfer agent will have until the last business day before the next date on which the shares trade on an "ex-dividend" basis, but in no event more than 30 days after the dividend payment date (the "last purchase date"), to invest the dividend amount in shares acquired in open-market purchases. It is contemplated that the Fund will pay monthly income dividends. Therefore, the period during which open-market purchases can be made will exist only from the payment date of the dividend through the date before the next "ex-dividend" date, which typically will be approximately ten days. If, before the transfer agent has completed its open-market purchases, the market price of a share, plus estimated brokerage commissions, exceeds the net asset value per share, the average per share purchase price paid by the transfer agent may exceed the Fund's net asset value per share, resulting in the acquisition of fewer shares than if the dividend had been paid in newly issued shares on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that, if the transfer agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the transfer agent will cease making open-market purchases and will invest the uninvested portion of the dividend amount in newly issued shares at the close of business on the earlier of the last purchase 29 date or the first day during the purchase period on which the net asset value per share equals or is less than the market price per share, plus estimated brokerage commissions. The transfer agent will maintain all shareholder accounts in the Plan and will furnish written confirmations of all transactions in the accounts, including information needed by shareholders for personal and tax records. Shares in the account of each Plan participant will be held by the transfer agent in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. There will be no charge to participants for reinvesting dividends. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the transfer agent's open market purchases of shares in connection with the reinvestment of dividends. The automatic reinvestment of dividends in shares does not relieve participants of any income tax that may be payable on such dividends. Shareholders who participate in the Plan may receive benefits not available to shareholders who do not participate in the Plan. If the market price (plus commissions) of the shares is above their net asset value, participants in the Plan will receive shares at less than they could otherwise purchase them and will have shares with a cash value greater than the value of any cash dividends they would have received on their shares. If the market price plus commissions is below the net asset value, participants will receive dividends in shares with a net asset value greater than the value of any cash dividends they would have received on their shares. However, there may be insufficient shares available in the market to distribute dividends in shares at prices below the net asset value. Also, since the Fund does not redeem its shares, the price on resale may be more or less than the net asset value. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan with respect to any dividend or other distribution if notice of the change is sent to Plan participants at least 30 days before the record date for such distribution. The Plan also may be amended or terminated by the transfer agent by at least 30 days written notice to all Plan participants. Additional information regarding the Plan may be obtained from, and all correspondence concerning the Plan should be directed to, the transfer agent at PFPC Inc., P.O. Box 8030, Boston, Massachusetts 02266-8030. For further information regarding the Plan, you may also contact the transfer agent directly at 1-800-331-1710. 30 (This page intentionally left blank). 31 SUPPLEMENTAL INFORMATION (UNAUDITED) BOARD OF DIRECTORS & OFFICERS The Fund is governed by a Board of Directors which oversees the Fund's operations. Each Director serves until the next annual meeting of shareholders or until his or her successor is elected and qualified. Officers are appointed by the Directors and serve at the pleasure of the Board. The table below shows, for each Director and Officer, his or her name, address and age, the position held with the Fund, the length of time served as a Director or Officer of the Fund, the Director's or Officer's principal occupations during the last five years, the number of portfolios in the Fund complex overseen by the Director or for which a person served as an officer, and other directorships held by the Director. INTERESTED DIRECTORS
POSITION(S) LENGTH OF NAME, ADDRESS, HELD WITH TIME PRINCIPAL OCCUPATION(S) AND AGE FUND SERVED DURING PAST 5 YEARS - ---------------------------------------------------------------------------------------------------- Margo N. Alexander*+; 55 Director Since 1998 Mrs. Alexander is an executive vice president of UBS PaineWebber Inc. ("UBSPaineWebber(SM)"++) (since March 1984). She was chief executive officer of UBS Global AM from January 1995 to October 2000, a director (from January 1995 to September 2001) and chairman (from March 1999 to September 2001). E. Garrett Bewkes, Jr.**+; 75 Director Since 1998 Mr. Bewkes serves as a consultant to and UBS PaineWebber (since May 1999). Chairman Prior to November 2000, he was a of the director of Paine Webber Group Inc. Board of ("PW Group," formerly the holding Directors company of UBS PaineWebber and UBS Global AM) and prior to 1996, he was a consultant to PW Group. Prior to 1988, he was chairman of the board, president and chief executive officer of American Bakeries Company.
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NUMBER OF PORTFOLIOS IN FUND COMPLEX OTHER DIRECTORSHIPS OVERSEEN BY DIRECTOR HELD BY DIRECTOR - ---------------------------------------------------------------------------------------------------- Mrs. Alexander is a director or trustee None of 22 investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager. Mr. Bewkes is a director or trustee of 34 Mr. Bewkes is also a director of Interstate investment companies (consisting of 55 Bakeries Corporation. portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
33 INDEPENDENT DIRECTORS
POSITION(S) LENGTH OF NAME, ADDRESS, HELD WITH TIME PRINCIPAL OCCUPATION(S) AND AGE FUND SERVED DURING PAST 5 YEARS - ----------------------------------------------------------------------------------------------------------- Richard Q. Armstrong; 67 Director Since 1998 Mr. Armstrong is chairman and principal R.Q.A. Enterprises of R.Q.A. Enterprises (management One Old Church Road-- consulting firm) (since April 1991 and Unit # 6 principal occupation since March 1995). Greenwich, CT 06830 Mr. Armstrong was chairman of the board, chief executive officer and co-owner of Adirondack Beverages (producer and distributor of soft drinks and sparkling/still waters) (October 1993- March 1995). He was a partner of The New England Consulting Group (management consulting firm) (December 1992-September 1993). He was managing director of LVMH U.S. Corporation (U.S. subsidiary of the French luxury goods conglomerate, Louis Vuitton Moet Hennessey Corporation) (1987-1991) and chairman of its wine and spirits subsidiary, Schieffelin & Somerset Company (1987-1991). David J. Beaubien; 67 Director Since 2001 Mr. Beaubien is chairman of Yankee 101 Industrial Road Environmental Systems, Inc., a manu- Turners Falls, MA 01376 facturer of meteorological measuring systems. Prior to January 1991, he was senior vice president of EG&G, Inc., a company which makes and provides a variety of scientific and technically oriented products and services. From 1985 to January 1995, Mr. Beaubien served as a director or trustee on the boards of the Kidder, Peabody & Co. Incorporated mutual funds.
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NUMBER OF PORTFOLIOS IN FUND COMPLEX OTHER DIRECTORSHIPS OVERSEEN BY DIRECTOR HELD BY DIRECTOR - ---------------------------------------------------------------------------------------------------------- Mr. Armstrong is a director or trustee of 22 Mr. Armstrong is also a director of AlFresh investment companies (consisting of 43 Beverages Canada, Inc. (a Canadian Beverage portfolios) for which UBS Global AM, UBS subsidiary of AlFresh Foods Inc.) (since October PaineWebber or one of their affiliates serves 2000). as investment advisor, sub-advisor or manager. Mr. Beaubien is a director or trustee of 22 Mr. Beaubien is also a director of IEC Electronics, investment companies (consisting of 43 Inc., a manufacturer of electronic assemblies. portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
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POSITION(S) LENGTH OF NAME, ADDRESS, HELD WITH TIME PRINCIPAL OCCUPATION(S) AND AGE FUND SERVED DURING PAST 5 YEARS - ----------------------------------------------------------------------------------------------------------- Richard R. Burt; 55 Director Since 1998 Mr. Burt is chairman of Diligence LLC 1275 Pennsylvania Ave., (international information and security N.W. firm) and IEP Advisors (international Washington, D.C. 20004 investments and consulting firm). He was the chief negotiator in the Strategic Arms Reduction Talks with the former Soviet Union (1989-1991) and the U.S. Ambassador to the Federal Republic of Germany (1985-1989). From 1991-1994, he served as a partner of McKinsey & Company (management consulting firm). Meyer Feldberg; 60 Director Since 1998 Mr. Feldberg is Dean and Professor of Columbia University Management of the Graduate School 101 Uris Hall of Business, Columbia University. Prior New York, New York to 1989, he was president of the Illinois 10027 Institute of Technology. George W. Gowen; 72 Director Since 1998 Mr. Gowen is a partner in the law firm 666 Third Avenue of Dunnington, Bartholow & Miller. New York, New York Prior to May 1994, he was a partner in 10017 the law firm of Fryer, Ross & Gowen. William W. Hewitt, Jr.***; 73 Director Since 2001 Mr. Hewitt is retired. From 1990 to c/o UBS Global Asset January 1995, Mr. Hewitt served as a Management (US) Inc. director or trustee on the boards of the 51 West 52nd Street Kidder, Peabody & Co. Incorporated mutual New York, New York funds. From 1986-1988, he was an executive 10019-6114 vice president and director of mutual funds, insurance and trust services of Shearson Lehman Brothers Inc. From 1976-1986, he was president of Merrill Lynch Funds Distributor, Inc. Morton L. Janklow; 72 Director Since 2001 Mr. Janklow is senior partner of Janklow 445 Park Avenue & Nesbit Associates, an international New York, New York literary agency representing leading 10022 authors in their relationships with publishers and motion picture, television and multi-media companies, and of counsel to the law firm of Janklow & Ashley.
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NUMBER OF PORTFOLIOS IN FUND COMPLEX OTHER DIRECTORSHIPS OVERSEEN BY DIRECTOR HELD BY DIRECTOR - -------------------------------------------------------------------------------------------------------- Mr. Burt is a director or trustee of 22 Mr. Burt is also a director of Archer-Daniels- investment companies (consisting of 43 Midland Company (agricultural commodities), portfolios) for which UBS Global AM, UBS Hollinger International Company (publishing), PaineWebber or one of their affiliates serves six investment companies in the Deutsche Bank as investment advisor, sub-advisor or manager. family of funds, nine investment companies in the Flag Investors family of funds, The Central European Fund, Inc. and The Germany Fund, Inc., a director of IGT, Inc. (provides technology to gaming and wagering industry) (since July 1999) and chairman of Weirton Steel Corp. (makes and finishes steel products) (since April 1996). Dean Feldberg is a director or trustee of 34 Dean Feldberg is also a director of Primedia Inc. investment companies (consisting of 55 (publishing), Federated Department Stores, Inc. portfolios) for which UBS Global AM, UBS (operator of department stores), Revlon, Inc. PaineWebber or one of their affiliates serves (cosmetics), Select Medical Inc. (healthcare as investment advisor, sub-advisor or manager. services) and SAPPI, Ltd. (producer of paper). Mr. Gowen is a director or trustee of 34 None investment companies (consisting of 55 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager. Mr. Hewitt is a director or trustee of 22 Mr. Hewitt is also a director or trustee of the investment companies (consisting of 43 Guardian Life Insurance Company mutual funds. portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager. Mr. Janklow is a director or trustee of 22 None investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
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POSITION(S) LENGTH OF NAME, ADDRESS, HELD WITH TIME PRINCIPAL OCCUPATION(S) AND AGE FUND SERVED DURING PAST 5 YEARS - ----------------------------------------------------------------------------------------------------------- Frederic V. Malek; 65 Director Since 1998 Mr. Malek is chairman of Thayer Capital 1455 Pennsylvania Avenue, Partners (merchant bank) and chairman N.W. of Thayer Hotel Investors III, Thayer Hotel Suite 350 Investors II and Lodging Opportunities Washington, D.C. Fund (hotel investment partnerships). 20004 From January 1992 to November 1992, he was campaign manager of Bush- Quayle `92. From 1990 to 1992, he was vice chairman and, from 1989 to 1990, he was president of Northwest Airlines Inc. and NWA Inc. (holding company of Northwest Airlines Inc.). Prior to 1989, he was employed by the Marriott Corporation (hotels, restaurants, airline catering and contract feeding), where he most recently was an executive vice president and president of Marriott Hotels and Resorts. Carl W. Schafer; 66 Director Since 1998 Mr. Schafer is president of the Atlantic 66 Witherspoon Street Foundation (charitable foundation). #1100 Prior to January 1993, he was chairman Princeton, NJ 08542 of the Investment Advisory Committee of the Howard Hughes Medical Institute. William D. White; 68 Director Since 2001 Mr. White is retired. From February P.O. Box 199 1989 through March 1994, he was Upper Black Eddy, PA president of the National League of 18972 Professional Baseball Clubs. Prior to 1989, he was a television sportscaster for WPIX-TV, New York. Mr. White served on the board of directors of Centel from 1989 to 1993 and until recently on the board of directors of Jefferson Banks Incorporated, Philadelphia, PA.
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NUMBER OF PORTFOLIOS IN FUND COMPLEX OTHER DIRECTORSHIPS OVERSEEN BY DIRECTOR HELD BY DIRECTOR - -------------------------------------------------------------------------------------------------------- Mr. Malek is a director or trustee of 22 Mr. Malek is also a director of Aegis investment companies (consisting of 43 Communications, Inc. (tele-services), American portfolios) for which UBS Global AM, UBS Management Systems, Inc. (management PaineWebber or one of their affiliates serves consulting and computer related services), as investment advisor, sub-advisor or manager. Automatic Data Processing, Inc. (computing services), CB Richard Ellis, Inc. (real estate services), FPL Group, Inc. (electric services), Manor Care, Inc. (health care), and Northwest Airlines Inc. Mr. Schafer is a director or trustee of 22 Mr. Schafer is also a director of Labor Ready, investment companies (consisting of 43 Inc. (temporary employment), Roadway Corp. portfolios) for which UBS Global AM, UBS (trucking), The Guardian Group of mutual PaineWebber or one of their affiliates serves funds, the Harding, Loevner Funds, E.I.I. Realty as investment advisor, sub-advisor or manager. Securities Trust (investment company) and Frontier Oil Corporation. Mr. White is a director or trustee of 22 None investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
39 OFFICERS
PRINCIPAL OCCUPATION(S) DURING POSITION(S) HELD PAST 5 YEARS; NUMBER OF WITH THE FUND; PORTFOLIOS IN FUND COMPLEX FOR NAME, ADDRESS AND AGE LENGTH OF TIME SERVED WHICH PERSON SERVES AS AN OFFICER - ---------------------------------------------------------------------------------------------------------------------------- Thomas Disbrow****; 36 Vice President and Mr. Disbrow is a director and a Assistant Treasurer senior manager of the mutual since 2000 fund finance department of UBS Global AM. Prior to November 1999, he was a vice president of Zweig/Glaser Advisers. Mr. Disbrow is a vice president and assistant treasurer of 22 investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub- advisor or manager. Amy R. Doberman**; 40 Vice President and Ms. Doberman is a managing Secretary director and general counsel of UBS since 2000 Global AM. From December 1997 through July 2000, she was general counsel of Aeltus Investment Management, Inc. Prior to working at Aeltus, Ms. Doberman was assistant chief counsel of the SEC's Division of Investment Management. Ms. Doberman is vice president and secretary of UBS Supplementary Trust and a vice president and secretary of 24 investment companies (consisting of 82 portfolios) for which UBS Global AM, UBS Global Asset Management (Americas) Inc. ("UBS Global AM (Americas)"), UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager. Stephen P. Fisher**; 43 Vice President Mr. Fisher is a managing director of UBS since 2002 Global AM. From October 2000 to February 2001, he was president of Morningstar Investment Services. From May 1999 to October 2000, Mr. Fisher was senior vice president of UBS Global AM. From January 1997 to May 1999, Mr. Fisher was a senior vice president of Prudential Investments. Mr. Fisher is a vice president of 22 investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
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PRINCIPAL OCCUPATION(S) DURING POSITION(S) HELD PAST 5 YEARS; NUMBER OF WITH THE FUND; PORTFOLIOS IN FUND COMPLEX FOR NAME, ADDRESS AND AGE LENGTH OF TIME SERVED WHICH PERSON SERVES AS AN OFFICER - ---------------------------------------------------------------------------------------------------------------------------- David M. Goldenberg**; 35 Vice President and Mr. Goldenberg is an executive Assistant Secretary director and deputy general counsel since 2002 of UBS Global AM. From 2000-2002 he was director, legal affairs at Lazard Asset Management. Mr. Goldenberg was global director of compliance for SSB Citi Asset Management Group from 1998-2000. He was associate general counsel at Smith Barney Asset Management from 1996-1998. Prior to working at Smith Barney Asset Management, Mr. Goldenberg was branch chief and senior counsel of the SEC's Division of Investment Management. Mr. Goldenberg is a vice president and assistant secretary of 24 investment companies (consisting of 82 portfolios) for which UBS Global AM, UBS Global AM (Americas), UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager. Kevin J. Mahoney****; 36 Vice President and Mr. Mahoney is a director and a Assistant Treasurer senior manager of the mutual fund since 1999 finance department of UBS Global AM. From August 1996 through March 1999, he was the manager of the mutual fund internal control group of Salomon Smith Barney. Mr. Mahoney is a vice president and assistant treasurer of 22 investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager. John Penicook*****; 44 Vice President Mr. Penicook is a managing director and head since 2002 of fixed income of UBS Global AM (Americas). Mr. Penicook is a vice president of five investment companies (consisting of five portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
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PRINCIPAL OCCUPATION(S) DURING POSITION(S) HELD PAST 5 YEARS; NUMBER OF WITH THE FUND; PORTFOLIOS IN FUND COMPLEX FOR NAME, ADDRESS AND AGE LENGTH OF TIME SERVED WHICH PERSON SERVES AS AN OFFICER - ---------------------------------------------------------------------------------------------------------------------------- Paul H. Schubert****; 39 Vice President and Mr. Schubert is an executive director Treasurer since 1998 and head of the mutual fund finance department of UBS Global AM. Mr. Schubert is treasurer and principal accounting officer of UBS Supplementary Trust and of two investment companies (consisting of 39 portfolios) and a vice president and treasurer of 22 investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS Global AM (Americas), UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager. Brian M. Storms**; 47 President Since 2000 Mr. Storms is chief executive officer (since July 2002) and president of UBS Global AM (since March 1999), and chief executive officer (since July 2002), director and president of UBS Global AM (Americas) and UBS Global Asset Management (New York) Inc. (since October 2001). Mr. Storms was chief executive officer of UBS Global AM from (October 2000 to September 2001) and chief operating officer (from September 2001 to July 2002). He was chief operating officer of UBS Global AM (Americas) and UBS Global Asset Management (New York) Inc. (2001-2002). He was director/trustee of several investment companies in the UBS family of funds (1999-2001). He was president of Prudential Investments (1996-1999). Prior to joining Prudential Investments he was a managing director at Fidelity Investments. Mr. Storms is president and trustee of UBS Supplementary Trust and of two investment companies (consisting of 39 portfolios) and president of 22 investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS Global AM (Americas), UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
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PRINCIPAL OCCUPATION(S) DURING POSITION(S) HELD PAST 5 YEARS; NUMBER OF WITH THE FUND; PORTFOLIOS IN FUND COMPLEX FOR NAME, ADDRESS AND AGE LENGTH OF TIME SERVED WHICH PERSON SERVES AS AN OFFICER - ---------------------------------------------------------------------------------------------------------------------------- Keith A. Weller**; 40 Vice President and Mr. Weller is a director and senior Assistant Secretary associate general counsel of UBS since 1998 Global AM. Mr. Weller is a vice president and assistant secretary of 22 investment companies (consisting of 43 portfolios) for which UBS Global AM, UBS PaineWebber or one of their affiliates serves as investment advisor, sub-advisor or manager.
* This person's business address is 1285 Avenue of the Americas, 33rd Floor, New York, New York 10019-6114. ** This person's business address is 51 West 52nd Street, New York, New York 10019-6114. *** Address for mailing purposes only. **** This person's business address is Newport Center III, 499 Washington Blvd., 14th Floor, Jersey City, New Jersey 07310-1998. ***** This person's business address is 209 South LaSalle Street, Chicago, Illinois 60604-1295. + Mr. Bewkes and Mrs. Alexander are "interested persons" of the Fund as defined in the Investment Company Act by virtue of their positions with UBS Global AM and/or UBS PaineWebber. ++ UBS PaineWebber is a service mark of UBS AG. 43 DIRECTORS E. Garrett Bewkes, Jr. George W. Gowen CHAIRMAN William W. Hewitt, Jr. Margo N. Alexander Morton L. Janklow Richard Q. Armstrong Frederic V. Malek David J. Beaubien Carl W. Schafer Richard R. Burt William D. White Meyer Feldberg PRINCIPAL OFFICERS Brian M. Storms Paul H. Schubert PRESIDENT VICE PRESIDENT AND TREASURER Amy R. Doberman VICE PRESIDENT AND SECRETARY INVESTMENT MANAGER AND ADMINISTRATOR UBS Global Asset Management (US) Inc. 51 West 52nd Street New York, New York 10019-6114 SUB-ADVISOR UBS Global Asset Management (New York) Inc. 51 West 52nd Street New York, New York 10019-6114 THIS REPORT IS SENT TO THE SHAREHOLDERS OF THE FUND FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR THE USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT. NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(c) OF THE INVESTMENT COMPANY ACT OF 1940 THAT FROM TIME TO TIME THE FUND MAY PURCHASE SHARES OF ITS COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES. [Logo--Three keys design for UBS Global Asset Management] UBS GLOBAL ASSET MANAGEMENT (US) INC. 51 West 52nd Street New York, New York 10019-6114 -----END PRIVACY-ENHANCED MESSAGE-----