<PAGE>
THE HIGH YIELD PLUS FUND, INC.
3,799,518 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
3,799,518 TRANSFERABLE RIGHTS TO SUBSCRIBE FOR SUCH SHARES
--------------
The High Yield Plus Fund, Inc. (the "Fund") is issuing to its shareholders
of record ("Record Date Shareholders") as of the close of business on December
31, 1998 (the "Record Date") transferable rights ("Rights") entitling the
holders thereof to subscribe for an aggregate of 3,799,518 shares of common
stock of the Fund ("Shares"), par value $0.01 per Share (the "Offer"). YOU
WILL RECEIVE ONE RIGHT FOR EACH THREE SHARES YOU HOLD ON THE RECORD DATE. The
Rights entitle you to subscribe for Shares at the rate of one Share for every
one Right held. The Rights further entitle you to subscribe, subject to
certain limitations and subject to allotment, for any Shares not acquired by
other shareholders in the primary subscription (the "Over-Subscription
Privilege"). The Rights are transferable and will be listed for trading on the
New York Stock Exchange under the symbol "HYP.RT." The Shares trade on the New
York Stock Exchange under the symbol "HYP."
The subscription price for each Share to be issued pursuant to the Offer
will be the lower of (a) 97% of the net asset value per Share as of the close
of business on the expiration date of the Offer or (b) 95% of the average of
the last reported sales price of a Share on the New York Stock Exchange on the
expiration date of the Offer and the four preceding business days (the
"Subscription Price"). You will not know the actual Subscription Price at the
time of exercise. You therefore will be required initially to pay for the
Shares at the estimated Subscription Price of $7.35 per Share (based on the
Fund's net asset value per Share and last reported sales price on December 24,
1998) ("Estimated Subscription Price"). Once you subscribe for Shares and your
payment is received, you will not be able to change your decision.
The Fund announced its intention to make the Offer after the close of
trading on the New York Stock Exchange on November 16, 1998. The net asset
value per Share at the close of business on November 16, 1998 and December 24,
1998 was $7.49 and $7.58, respectively, and the closing market price per Share
on the New York Stock Exchange on those dates was $8.625 and $7.875,
respectively.
The Offer will expire at 5:00 p.m., Eastern time, on February 2, 1999,
unless extended by the Fund.
If you do not fully exercise your Rights you should expect that you will,
at the completion of the Offer, own a smaller proportional interest in the
Fund than would otherwise be the case.
The Fund is a diversified, closed-end management investment company
registered under the Investment Company Act of 1940. The Fund's primary
investment objective is to provide a high level of current income. A secondary
objective is capital appreciation, but only when consistent with its primary
objective.
The Fund invests in a professionally managed, diversified portfolio made up
primarily of lower rated "high yield, high risk" fixed income securities
(commonly referred to as "junk bonds") and other types of high risk
securities. Lower rated securities generally involve greater risks, including
risk of default, volatility of price and risks to principal and income, than
securities in higher rating categories. The Fund maintains a leveraged capital
structure, through bank borrowings, which creates the opportunity for greater
total returns, but also involves certain substantial additional risks. An
investment in the Fund is not appropriate for all investors, and no assurance
can be given that the Fund will achieve its investment objectives. SEE "THE
FUND" AND "RISK FACTORS AND SPECIAL CONSIDERATIONS."
Further information concerning the Fund and the securities in which it
invests can be found in the Fund's registration statement, of which this
Prospectus constitutes a part, on file with the Securities and Exchange
Commission.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
PER SHARE TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C>
Estimated Subscription Price.................. $7.35 $27,926,460
- --------------------------------------------------------------------------------
Sales Load.................................... $0.35 $1,322,126
- --------------------------------------------------------------------------------
Estimated Proceeds to Fund.................... $7.00 $26,604,334
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference.
ALL QUESTIONS AND INQUIRIES RELATING TO THE OFFER SHOULD BE DIRECTED TO
SHAREHOLDER COMMUNICATIONS CORPORATION TOLL FREE AT (800) 733-8481, EXT. 486.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, NJ
07102-4077, and its telephone number is (800) 451-6788.
The date of this Prospectus is December 31, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................... 3
FEE TABLE AND EXAMPLE...................................................... 6
FINANCIAL HIGHLIGHTS....................................................... 7
CAPITALIZATION AT SEPTEMBER 30, 1998....................................... 9
INFORMATION REGARDING SENIOR SECURITIES.................................... 9
TRADING AND NET ASSET VALUE INFORMATION.................................... 10
THE OFFER.................................................................. 11
USE OF PROCEEDS............................................................ 20
THE FUND................................................................... 21
INVESTMENT POLICIES AND LIMITATIONS........................................ 22
INVESTMENT RESTRICTIONS.................................................... 30
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................... 31
DIVIDENDS AND OTHER DISTRIBUTIONS: DIVIDEND REINVESTMENT PLAN.............. 35
MANAGEMENT OF THE FUND..................................................... 36
NET ASSET VALUE............................................................ 40
FEDERAL TAXATION........................................................... 40
DESCRIPTION OF COMMON STOCK................................................ 43
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS............ 44
DESCRIPTION OF CREDIT AGREEMENT............................................ 45
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR......... 46
LEGAL OPINIONS............................................................. 46
REPORTS TO SHAREHOLDERS.................................................... 46
EXPERTS.................................................................... 46
FURTHER INFORMATION........................................................ 47
FINANCIAL STATEMENTS....................................................... F-1
REPORT OF INDEPENDENT ACCOUNTANTS.......................................... F-36
APPENDIX A................................................................. A-1
APPENDIX B................................................................. B-1
</TABLE>
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it is in the best
interests of the Fund and its shareholders to increase the number of
outstanding Shares of the Fund and to increase the assets of the Fund available
for investment. In reaching its decision, the Board noted that investment
opportunities in the lower rated "high yield, high risk" fixed income
securities market have broadened on a worldwide basis, and that many more
investment opportunities for the Fund exist now than in the recent past. The
Board concluded that an increase in the assets of the Fund would permit the
Fund to take advantage of these additional investment opportunities, consistent
with the Fund's investment objectives, while retaining investments believed to
be attractive in the Fund's portfolio. The Board considered that the Offer:
(1) May permit the Fund to increase the diversity of its portfolio
(thereby potentially lowering overall risk) and may enhance the
Fund's ability to buy and sell larger blocks of securities on better
terms, and
(2) May improve the Fund's ability to participate in investments, mainly
U.S. dollar-based, on a global basis.
The Board believes that the Offer would permit the Fund to accomplish these
objectives while allowing existing shareholders an opportunity to purchase
additional Shares at a price below market value without paying a brokerage
commission.
IMPORTANT TERMS OF THE OFFERING
<TABLE>
<S> <C>
Estimated Subscription Price............... $7.35
Shares outstanding at December 31, 1998.... 11,398,555
Number of Rights issued.................... 3,799,518
Number of Rights issued per existing
Shares.................................... 1 Right for each 3 Shares held
Subscription ratio......................... 1 Right to buy 1 Share
Maximum number of Shares to be issued...... 3,799,518
</TABLE>
HOW TO EXERCISE RIGHTS
. If your existing Shares are held in a brokerage account or by a
custodian bank or trust company, contact your broker or financial
adviser for additional instructions on how to participate in the Offer.
. Complete, sign and date the enclosed subscription certificate.
. Make your check or money order payable to "The High Yield Plus Fund,
Inc." in the amount of $7.35 for each Share you wish to buy, including
any Shares you wish to buy pursuant to the Over-Subscription Privilege.
This payment may be more or less than the actual Subscription Price.
Additional payment may be required when the actual Subscription Price is
determined.
. You should mail the subscription certificate and your payment in the
enclosed envelope to State Street Bank and Trust Company in a manner
that will ensure receipt prior to 5:00 p.m., Eastern time, on February
2, 1999, unless extended.
3
<PAGE>
Once you subscribe for Shares and your payment is received, you will not be
able to change your decision. See "The Offer--Method for Exercising Rights" and
"The Offer--Payment for Shares."
IMPORTANT DATES TO REMEMBER
<TABLE>
<S> <C>
. RECORD DATE DECEMBER 31, 1998
. FINAL DATE FOR SALES OF RIGHTS FEBRUARY 1, 1999
. EXPIRATION DATE (PAYMENT FOR SHARES AND NOTICES OF FEBRUARY 2, 1999 (UNLESS EXTENDED)
GUARANTEED DELIVERY DUE)
. DUE DATE FOR DELIVERY BY BROKERAGE FIRMS OR FEBRUARY 5, 1999 (UNLESS EXTENDED)
CUSTODIAN BANKS OF PAYMENT AND SUBSCRIPTION
CERTIFICATES TO SUBSCRIPTION AGENT PURSUANT TO
NOTICE OF GUARANTEED DELIVERY
</TABLE>
SHAREHOLDERS SHOULD DIRECT THEIR QUESTIONS TO THE INFORMATION AGENT:
SHAREHOLDER COMMUNICATIONS CORPORATION
17 STATE STREET, 27TH FLOOR
NEW YORK, NEW YORK 10004
TOLL FREE: (800) 733-8481, EXT. 486
TERMS OF THE OFFER
The Fund is issuing Rights to its Record Date Shareholders. These Rights
entitle you to subscribe for Shares at the rate of one Share for every one
Right held by you. You will receive one Right for each three Shares you hold on
the Record Date. For example, if you own 300 Shares, you will receive 100
Rights entitling you to purchase up to 100 additional Shares at the
Subscription Price. You may exercise Rights at any time from the date of this
Prospectus until 5:00 p.m., Eastern time, on February 2, 1999, unless extended.
In addition, if you subscribe for the maximum number of Shares to which you
are entitled, you may also subscribe for Shares that were not otherwise
subscribed for by other shareholders. Shares acquired pursuant to the Over-
Subscription Privilege are subject to allotment, which is more fully discussed
below under "The Offer--Over-Subscription Privilege."
The Subscription Price per Share will be the lower of (a) 97% of the net
asset value per Share as of the close of business on the expiration date of the
Offer or (b) 95% of the average of the last reported sales price of a Share on
the New York Stock Exchange on the expiration date of the Offer and the four
preceding business days.
The Rights are transferable and will trade on the New York Stock Exchange.
See "The Offer--Sale of Rights."
THE FUND
The Fund is a diversified, closed-end management investment company. The
Fund's primary investment objective is to provide a high level of current
income. Its secondary objective is capital appreciation, but only when
consistent with its primary objective.
The Fund invests in a portfolio comprised primarily of lower rated "high
yield, high risk" fixed income securities (commonly referred to as "junk
bonds") and other types of high risk securities. The Fund historically has
maintained a leveraged capital structure, through the use of bank borrowings,
which creates the opportunity for greater total returns.
4
<PAGE>
As discussed more fully in the body of this Prospectus, investment in the
Fund involves a number of significant and substantial risks, including:
(1) The possibility that the lower rated securities and other high risk
securities in which the Fund primarily invests may be more likely to
default and more volatile than other debt securities.
(2) The Fund's leveraged capital structure, which will exaggerate any
increases or decreases in the net asset value of Shares and in the
yield on the Fund's portfolio.
(3) The fluctuation of the Fund's net asset value in connection with
changes in the value of its portfolio securities.
(4) Risks associated with the Fund's investments in foreign securities
and in certain restricted and illiquid securities.
The Fund's leveraged capital structure involves certain substantial
additional risks, including:
(1) The exaggeration of any increases or decreases in the net asset value
of Shares and in the yield on the Fund's portfolio.
(2) The possibility that the increase in the Fund's expenses due to the
borrowing may exceed the income from the securities purchased.
No assurance can be given that the Fund will achieve its investment
objectives.
In addition, the rights offering involves the risk of an immediate dilution
of the aggregate net asset value of your Shares if you do not fully exercise
your Rights.
THE INVESTMENT ADVISER
Wellington Management Company, LLP, with its principal offices at 75 State
Street, Boston, Massachusetts, 02109, has served as the Fund's investment
adviser since 1988, when the Fund was organized.
As of September 30, 1998, Wellington Management:
(1) Has discretionary authority over $187 billion of assets, including
$79 billion of fixed income securities of which $6.6 billion
represents "high-yield" investments.
(2) Has provided investment advisory services to investment companies
since 1928 and to investment counseling clients since 1960.
Catherine Smith, Senior Vice President of Wellington Management, has managed
the Fund since its inception in April of 1988.
THE ADMINISTRATOR
Prudential Investments Fund Management LLC is the administrator of the Fund.
It provides meeting facilities for the Board of Directors and shareholders of
the Fund and office facilities and personnel to assist the officers of the Fund
in the performance of certain services.
----------------
Before exercising your Rights pursuant to the Offer, you should consider the
factors described in this Prospectus, including without limitation, the factors
described under "The Fund," "Investment Objectives and Policies" and "Risk
Factors and Special Considerations." These factors include the effects of the
Offer, the effects of the Fund's use of bank borrowings, the significant and
substantial risks involved in investing in lower rated high yield, high risk
fixed income securities, the limitations on the ability of the Fund to pay
dividends if it fails to meet certain asset coverage requirements, and the fact
that Shares sometimes trade above or below their net asset value.
5
<PAGE>
FEE TABLE AND EXAMPLE
The following Fee Table and Example are intended to assist investors in
understanding the costs and expenses that an investor in the Fund will bear
directly or indirectly.
FEE TABLE:
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of the Subscription Price per Share)(1).. 3.50%
ANNUAL EXPENSES (as a percentage of average weekly net assets
attributable to Shares)(2)
Investment Advisory Fees............................................. 0.50%
Administration Fees.................................................. 0.20%
Interest............................................................. 1.93%
Other Expenses....................................................... 0.32%
----
Total Annual Expenses............................................. 2.95%
====
</TABLE>
- ----------------
(1) The Fund has agreed to pay A.G. Edwards & Sons, Inc. (the "Dealer-
Manager") a fee for its financial advisory, marketing and soliciting
services equal to (a) 3.50% of the Subscription Price per Share for
Shares issued pursuant to the exercise of the Rights and the Over-
Subscription Privilege, less (b) a $25,000 retainer fee paid to the
Dealer-Manager by the Fund pursuant to a letter agreement between the
Fund and the Dealer-Manager. The Dealer-Manager will reallow soliciting
fees to broker-dealers who have entered into a Soliciting Dealer
Agreement with the Dealer-Manager equal to 2.50% of the Subscription
Price per Share for Shares issued pursuant to the exercise of the Rights
and the Over-Subscription Privilege. The Fund has also agreed to
reimburse the Dealer-Manager for its out-of-pocket costs and expenses
relating to the Offer up to an aggregate of $50,000; provided, however,
that if fewer than 1,900,000 Shares are issued upon the exercise of
Rights in connection with the Offer, such reimbursement will be limited
to a maximum of $25,000. In addition, the Fund has agreed to pay fees to
the subscription agent and the information agent, estimated to be $40,000
and $30,000, respectively, for their services related to the Offer,
excluding reimbursement for their out-of-pocket expenses. These fees and
expenses will be borne by the Fund and indirectly by all of the Fund's
shareholders, including those shareholders who do not exercise their
Rights.
(2) Amounts are based on estimated amounts for the Fund's current fiscal year
after giving effect to anticipated net proceeds of the Offer, assuming
that all of the Rights are exercised and assuming that the Fund is able
to increase the amount it may borrow to the maximum amount then
permissible under the Investment Company Act of 1940 ("1940 Act").
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------- ----------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return
throughout the periods............ $30 $91 $155 $327
</TABLE>
The Example set forth above assumes reinvestment of all dividends and other
distributions at net asset value and an annual expense ratio of 2.95%. The Fee
Table above and the assumption in the Example of a 5% annual return are
required by Securities and Exchange Commission ("Commission") regulations
applicable to all management investment companies. THE EXAMPLE AND FEE TABLE
SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
ANNUAL RATES OF RETURN, WHICH MAY BE MORE OR LESS THAN THOSE ASSUMED FOR
PURPOSES OF THE EXAMPLE AND FEE TABLE. In addition, while the Example assumes
reinvestment of all dividends and other distributions at net asset value,
participants in the Fund's Dividend Reinvestment Plan may receive Shares
purchased or issued at a price or value different from net asset value. See
"Dividends and Other Distributions; Dividend Reinvestment Plan."
6
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a Share
outstanding throughout each period presented. The financial highlights for the
fiscal years ended March 31, 1998 and 1997 have been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants, whose reports
thereon were unqualified. The financial highlights for the remaining periods
(other than for the period ended September 30, 1998) have been audited by
Deloitte & Touche LLP. The financial highlights for the period ended September
30, 1998 have not been audited. This information should be read in conjunction
with the Financial Statements and Notes thereto included in the Fund's March
31, 1998 Annual Report and September 30, 1998 Semi-Annual Report and included
in this Prospectus.
<TABLE>
<CAPTION>
(UNAUDITED) YEARS ENDED MARCH 31,
SIX MONTHS --------------------------------------------
ENDED (Dollar amounts in thousands, except per
SEPTEMBER 30, Share data)
1998 1998 1997 1996 1995 1994
------------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of year...... $ 9.21 $8.54 $8.44 $7.85 $8.38 $8.48
-------- -------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .45 .84 .82 .84 .87 .90
Net realized and
unrealized gain (loss)
on investments......... (2.00) .67 .12 .59 (.54) (.15)
-------- -------- ------- ------- ------- -------
Total from investment
operations.......... (1.55) 1.51 .94 1.43 .33 .75
-------- -------- ------- ------- ------- -------
LESS DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income...... (.42) (.84) (.82) (.84) (.86) (.85)
Distributions in excess
of net
investment income...... -- -- (.02) -- -- --
-------- -------- ------- ------- ------- -------
Total dividends and
distributions....... (.42) (.84) (.84) (.84) (.86) (.85)
-------- -------- ------- ------- ------- -------
Net asset value, end of
year(a)................ $ 7.24 $9.21 $8.54 $8.44 $7.85 $8.38
======== ======== ======= ======= ======= =======
Market price per Share,
end of year(a)......... $ 8.00 $9.125 $9.00 $8.75 $8.00 $8.375
======== ======== ======= ======= ======= =======
TOTAL INVESTMENT
RETURN(b).............. (7.81)% 11.25% 13.38% 20.80% 6.33% 3.90%
======== ======== ======= ======= ======= =======
RATIO/SUPPLEMENTAL DATA:
Net assets, end of
year................... $ 82,311 $104,558 $96,042 $94,091 $86,704 $91,698
Average net assets...... $106,099 $100,766 $95,946 $92,855 $87,734 $96,962
Ratio to average net
assets:
Expenses, before loan
interest, commitment
fees and
nonrecurring
expenses............ .99%(c) 1.07% 1.08% 1.01% 1.11% 1.12%
Total expenses....... 2.84%(c) 2.44% 2.32% 2.29% 2.71% 2.01%
Net investment
income.............. 9.65%(c) 9.41% 9.63% 10.18% 10.90% 10.15%
Portfolio turnover
rate................... 54% 112% 60% 60% 47% 100%
Total debt outstanding
at end of year......... $ 32,000 $ 30,000 $18,000 $17,000 $19,000 $28,000
Asset coverage per
$1,000 of
debt outstanding....... $ 3,744 $ 4,485 $ 6,336 $ 6,535 $ 5,563 $ 4,275
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------- 4/22/88(d)
1993 1992 1991 1990 TO 3/31/89
---- ---- ---- ---- ---------------
(Dollar amounts in thousands, except per Share data)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of year................... $7.91 $6.80 $ 7.22 $ 8.90 $ 9.30
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... .89 .87 .99 1.12 .93
Net realized and unrealized
gain (loss) on
investments............... .52 1.11 (.41) (1.68) (.24)
---------- ---------- ---------- ---------- ----------
Total from investment
operations............. 1.41 1.98 .58 (.56) .69
---------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income......... (.84) (.87) (.99) (1.12) (.93)
Distributions in excess of
net investment income..... -- -- (.01) -- (.10)
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions.......... (.84) (.87) (1.00) (1.12) (1.03)
Capital Charge resulting
from the issuance of
Fund Shares............... -- -- -- -- (.06)
---------- ---------- ---------- ---------- ----------
Net asset value, end of
year(a)................... $8.48 $7.91 $ 6.80 $ 7.22 $ 8.90
========== ========== ========== ========== ==========
Market price per Share, end
of year(a)................ $8.875 $7.75 $ 6.50 $ 7.00 $ 8.625
========== ========== ========== ========== ==========
TOTAL INVESTMENT
RETURN(b)................. 27.02% 34.28% 9.14% (6.51)% (4.24)%
========== ========== ========== ========== ==========
RATIO/SUPPLEMENTAL DATA:
Net assets, end of year.... $ 92,422 $ 85,742 $ 73,656 $ 78,132 $ 96,259
Average net assets......... $ 88,142 $ 80,703 $ 70,661 $ 88,171 $ 98,447
Ratio to average net
assets:
Expenses, before loan
interest, commitment
fees and nonrecurring
expenses............... 1.20% 1.28% 1.28% 1.30% 1.02%(c)
Total expenses.......... 2.03% 2.26% 2.21% 2.57% 1.44%(c)
Net investment income... 10.94% 11.69% 15.23% 13.68% 10.89%(c)
Portfolio turnover rate.... 82% 46% 38% 32% 33%
Total debt outstanding at
end of year............... $ 15,000 $ 15,000 $ 6,000 $ 8,000 $ 12,000
Asset coverage per $1,000
of debt outstanding....... $ 7,161 $ 6,716 $ 13,276 $ 10,767 $ 9,022
</TABLE>
- ----------------
(a) Net asset value and market value are published in The Wall Street Journal
each Monday.
(b) Total investment return is calculated assuming a purchase of common stock
at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be
reinvested at prices obtained under the dividend reinvestment plan. This
calculation does not reflect brokerage commissions.
(c) Annualized.
(d) Commencement of investment operations.
8
<PAGE>
CAPITALIZATION AT SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
TITLE OF CLASS AMOUNT AUTHORIZED
-------------- -----------------
<S> <C>
Shares of Common Stock, par value $.01........................ 100,000,000
Amount of outstanding borrowings.............................. $32,000,000
</TABLE>
INFORMATION REGARDING SENIOR SECURITIES
As discussed further below, the Fund has entered into a credit agreement
dated as of October 31, 1993 and subsequently amended from time to time
("Credit Agreement") with BankBoston, N.A. ("BankBoston"), formerly known as
First National Bank of Boston, pursuant to which BankBoston has agreed to make
loans to the Fund from time to time. See "The Fund." The Fund's obligation to
BankBoston under the Credit Agreement is considered a senior security under,
and therefore is subject to special provisions of, the 1940 Act. See
"Description of Credit Agreement." The following table shows certain
information regarding the loans payable under the Credit Agreement (and under
a predecessor agreement with another bank) as of the end of each fiscal year
of the Fund since its inception.
<TABLE>
<CAPTION>
TOTAL AMOUNT ASSET COVERAGE
AT MARCH 31 OUTSTANDING PER UNIT(1)
--------------------- -------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C>
Loans Payable........... 1989 $12,000 $ 9,022
1990 8,000 10,767
1991 6,000 13,276
1992 15,000 6,716
1993 15,000 7,161
1994 28,000 4,275
1995 19,000 5,563
1996 17,000 6,535
1997 18,000 6,336
1998 30,000 4,485
At September 30, 1998 32,000 3,744
</TABLE>
- ----------------
(1) Amount shown is per $1,000 of outstanding loans. Asset coverage per unit
is calculated by subtracting the Fund's total liabilities, other than
liabilities for outstanding loans, from its total assets and dividing
such amount by the quotient of (a) the principal amount of outstanding
loans, divided by (b) $1,000.
9
<PAGE>
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Shares have traded at various times at either a premium or
a discount in relation to net asset value. Although the Shares recently have
been trading at a premium to net asset value, there can be no assurance that
this premium will continue after the Offer or that the Shares will not again
trade at a discount. Shares of other closed-end investment companies
frequently trade at a discount from net asset value. See "Risk Factors and
Special Considerations."
The following table shows the high and low sales prices of the Shares on
the New York Stock Exchange Composite Tape, quarterly trading volume on the
New York Stock Exchange (the "Exchange"), the high and low publicly reported
net asset value per Share, and the quarter-end premium or discount at which
the Shares were trading, for each fiscal quarter during the two most recent
fiscal years and for the fiscal quarters ended December 31, 1998, September
30, 1998 and June 30, 1998.
<TABLE>
<CAPTION>
QUARTERLY
TRADING PREMIUM
MARKET PRICE VOLUME NET ASSET VALUE (DISCOUNT)
-------------- (THOUSANDS --------------- TO NET
QUARTER ENDED HIGH LOW OF SHARES) HIGH LOW ASSET VALUE
------------- ------- ------ ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1996............. 8 7/8 8 5/8 613 8.50 8.35 3.17
September 30, 1996........ 9 8 1/2 807 8.60 8.30 3.08
December 31, 1996......... 9 1/4 8 7/8 742 8.71 8.58 6.57
March 31, 1997............ 9 3/8 9 950 8.88 8.61 5.39
June 30, 1997............. 9 3/8 8 3/4 716 8.91 8.49 4.16
September 30, 1997........ 9 7/16 9 1/8 789 9.03 8.85 4.17
December 31, 1997......... 9 11/16 9 1/6 670 9.12 8.83 6.62
March 31, 1998............ 9 15/16 9 1,312 9.22 8.93 (0.92)
June 30, 1998............. 9 1/8 8 7/8 1,109 9.30 8.85 1.69
September 30, 1998........ 9 7 1/2 1,231 8.93 7.17 10.50
December 31, 1998......... 8 5/8 7 9/16 1,090 7.72 6.82 2.36
</TABLE>
The net asset value per Share at the close of business on November 16, 1998
(the last trading date on which the Fund publicly reported its net asset value
prior to the announcement of the Offer) and on December 24, 1998 (the last
trading date prior to the date of this Prospectus on which the Fund publicly
reported its net asset value) were $7.49 and $7.58, respectively, and the last
reported sales prices of a Share on the Exchange on those dates were $8.625
and $7.875, respectively.
10
<PAGE>
THE OFFER
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it is in the best
interests of the Fund and its shareholders to increase the number of
outstanding Shares and to increase the assets of the Fund available for
investment by making the Offer. In reaching its decision, the Board noted that
investment opportunities in the lower rated "high yield, high risk" fixed
income securities market have broadened on a worldwide basis, and that many
more investment opportunities for the Fund exist now than in the recent past.
The Board of Directors concluded that an increase in the assets of the Fund
would permit the Fund to take advantage of these additional investment
opportunities, consistent with the Fund's investment objectives, while
retaining investments believed to be attractive in the Fund's portfolio. The
Board considered that the Offer may permit the Fund to increase the diversity
of its portfolio (thereby potentially lowering overall risk) and may enhance
the Fund's ability to buy and sell larger blocks of securities on better
terms. In addition, the Board considered that the Offer may improve the Fund's
ability to participate in investments on a global basis, as the global high
yield markets have significantly expanded over the past five years. The Board
of Directors believes that the Offer would permit the Fund to accomplish these
objectives while allowing existing shareholders an opportunity to purchase
additional Shares at a price below market value without paying a brokerage
commission.
The Fund utilizes leverage to achieve its investment objectives by
borrowing money pursuant to the Credit Agreement when Wellington Management
Company, LLP (the "Adviser") believes such leverage is of potential benefit to
shareholders. The Fund seeks to enhance returns to shareholders by borrowing
at an interest rate lower than the rate the Fund earns on its investments.
Leveraging will exaggerate any increases or decreases in the net asset value
of Shares and in the yield on the Fund's portfolio. For a discussion of the
anticipated impact of the Offer on the Fund's leverage, please refer to
"Investment Policies and Limitations" and "Risk Factors and Special
Considerations--Risk of Leverage."
The Board of Directors believes that increasing the size of the Fund may
lower its expenses as a percentage of average net assets because the Fund's
fixed costs can be spread over a larger asset base. The Board of Directors
also believes that a larger number of outstanding Shares and a larger number
of shareholders could increase the level of market interest in the Fund and
the liquidity of Shares on the Exchange. The distribution to shareholders of
transferable Rights, which themselves may have a realizable value, will also
afford nonparticipating shareholders the potential of receiving a cash payment
upon sale of such Rights, in partial compensation for the dilution of their
interest in the Fund that may result from the Offer.
The Board of Directors also considered the impact of the Offer on the
Fund's current monthly distributions. Based on the Adviser's assessment of
current market conditions in the lower rated debt market and available
leverage opportunities, the Board of Directors believes the Offer will not
result in a decrease in the Fund's current level of dividends per Share. For a
further discussion of the anticipated impact of the Offer on the Fund's
dividends and other distributions, please refer to "Risk Factors and Special
Considerations--Dividends and Other Distributions."
In considering the Offer and its effect on the best interests of the Fund
and its shareholders, the Board of Directors retained the Dealer-Manager to
provide the Fund with financial advisory, marketing and soliciting services
relating to the Offer, including the structure, timing and terms of the Offer.
In addition to the foregoing, the Board of Directors considered, among other
things, the benefits and drawbacks of conducting a transferable rights
offering versus a non-transferable offering, the pricing structure of the
Offer, the effect on the Fund if the Offer is undersubscribed and the
experience of the Dealer-Manager in conducting rights offerings. Since the
fees of the Adviser and Prudential Investments Fund Management LLC (the
"Administrator") are based on the Fund's net assets, the Adviser and the
Administrator will benefit from an increase in the Fund's assets resulting
from the Offer. See "The Adviser" and "The Administrator."
11
<PAGE>
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of Shares and on
terms which may or may not be similar to this Offer. Any such future rights
offering will be made in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to its Record Date Shareholders Rights entitling the
holders thereof to subscribe for an aggregate of 3,799,518 Shares. Record Date
Shareholders, where the context requires, shall include beneficial owners
whose Shares are held of record by Cede & Co. ("Cede"), nominee for The
Depository Trust Company ("DTC"), or by any other depository or nominee. In
the case of Shares held of record by Cede or any other depository or nominee,
beneficial owners for whom Cede or any other depository or nominee is the
holder of record will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee on their behalf. Each
Record Date Shareholder will receive one Right for each three Shares
beneficially owned on the Record Date, and the Rights entitle Record Date
Shareholders and holders of Rights acquired during the Subscription Period to
acquire one Share for each Right held. No fractional Shares will be issued. In
addition, the Rights entitle each Record Date Shareholder to subscribe,
pursuant to the Over-Subscription Privilege, for any Shares not acquired by
exercise of Rights in the primary subscription.
The right to acquire during the Subscription Period at the Subscription
Price one Share for every Right held is hereinafter referred to as the
"Primary Subscription." The Rights are transferable and persons who become
holders of Rights who are not Record Date Shareholders ("Rights Holders") may
also purchase Shares in the Primary Subscription and may subscribe, pursuant
to the Over-Subscription Privilege, for any Shares not acquired by exercise of
Rights in the Primary Subscription. All Rights may be exercised until 5:00
p.m., Eastern time, on February 2, 1999 (the "Expiration Date"). (Record Date
Shareholders and Rights Holders purchasing Shares in the Primary Subscription
and pursuant to the Over-Subscription Privilege (as described below) are
hereinafter referred to as "Exercising Rights Holders.")
Shares not subscribed for in the Primary Subscription will be offered, by
means of the Over-Subscription Privilege, to those Record Date Shareholders
and Rights Holders who have exercised all Rights held by them (other than
those Rights which cannot be exercised because they represent the right to
acquire less than one Share) and who wish to acquire more than the number of
Shares they are entitled to purchase pursuant to the exercise of their Rights.
Shares acquired pursuant to the Over-Subscription Privilege are subject to
allotment, as more fully discussed below under "Over-Subscription Privilege."
For purposes of determining the maximum number of Shares a shareholder may
acquire pursuant to the Offer, beneficial owners of Shares whose Shares are
held of record by Cede, as nominee for DTC, or by any other depository or
nominee will be deemed to be the holders of the Rights that are issued to Cede
or such other depository or nominee on their behalf.
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
The first regular dividend to be paid on Shares acquired upon exercise of
Rights will be the first monthly dividend, the record date for which occurs
after the issuance of such Shares following the Expiration Date. Except as
described below, it is expected that the first dividend to be paid on Shares
issued pursuant to the Offer will be paid on or about March 5, 1999.
Prior to the Expiration Date, the Dealer-Manager may offer Shares acquired
through its purchase and exercise of Rights at prices it sets from time to
time. To the extent such Shares are issued prior to a dividend record date of
the Fund that precedes the Expiration Date, such Shares will receive the
dividend declared to the same extent as other Shares outstanding on such
dividend record date, and thus the issuance of such Shares may have a dilutive
effect on the income per Share available for such dividend.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for in the Primary Subscription (the "Excess Shares")
will be offered, by means of the Over-Subscription Privilege, to those
Exercising Rights Holders who have exercised all exercisable Rights
12
<PAGE>
held by them (other than those Rights which cannot be exercised because they
represent the right to acquire less than one Share) and who wish to acquire
more than the number of Shares for which the Rights held by them are
exercisable. Exercising Rights Holders should indicate, on the Subscription
Certificate which they submit with respect to the exercise of the Rights held
by them, how many Excess Shares they are willing to acquire pursuant to the
Over-Subscription Privilege. If sufficient Excess Shares remain, all over-
subscription requests by Exercising Rights Holders will be honored in full. If
requests for Shares pursuant to the Over-Subscription Privilege exceed the
Excess Shares available, the available Excess Shares will be allocated pro
rata among Exercising Rights Holders who oversubscribe based on the number of
Rights held by such Exercising Rights Holders.
The Fund will not offer or sell in connection with the Offer any Shares
that are not subscribed for pursuant to the Primary Subscription or the Over-
Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for each Share to be issued pursuant to the Offer
will be the lower of (a) 97% of the net asset value per share as of the close
of business on the Expiration Date or (b) 95% of the average of the last
reported sales price of a share on the New York Stock Exchange on the
Expiration Date and the four preceding business days.
Exercising Rights Holders will not know the actual Subscription Price at
the time of exercise and will be required initially to pay for the Shares at
the Estimated Subscription Price of $7.35 per Share (based on the Fund's net
asset value per Share and last reported sales price on December 24, 1998). The
actual Subscription Price may be more than the Estimated Subscription Price.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on November 16, 1998. The net asset values per Share
at the close of business on November 16, 1998 (the last trading date on which
the Fund publicly reported its net asset value prior to the announcement) and
on December 24, 1998 (the last trading date prior to the date of this
Prospectus on which the Fund publicly reported its net asset value) were $7.49
and $7.58, respectively, and the last reported sales prices of a Share on the
Exchange on those dates were $8.625 and $7.875, respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., Eastern time, on February 2, 1999,
unless extended by the Fund. The Rights will expire on the Expiration Date and
thereafter may not be exercised. The Fund may make one or more extensions of
the Offer, as discussed below, up to an aggregate of 45 days from the
Expiration Date. Any extension of the Offer will be followed as promptly as
practicable by announcement thereof. Such announcement will be issued no later
than 9:00 a.m., Eastern time, on the next business day following the
previously scheduled Expiration Date. Without limiting the manner in which the
Fund may choose to make such announcement, the Fund will not, unless otherwise
required by law, have any obligation to publish, advertise or otherwise
communicate any such announcement other than by making a release to the Dow
Jones News Service or such other means of announcement as the Fund deems
appropriate.
SUBSCRIPTION AGENT
The subscription agent is State Street Bank and Trust Company (the
"Subscription Agent"). The Subscription Agent will receive for its
administrative, processing, invoicing and other services as subscription agent
a fee estimated to be approximately $40,000, excluding reimbursement for its
out-of-pocket expenses related to the Offer. The Subscription Agent is also
the Fund's transfer agent, dividend-paying agent and registrar for the Shares.
Questions regarding the Subscription Certificates should be directed to
Shareholder Communications Corporation at 800-733-8481, ext. 486 (toll free);
shareholders may also consult their brokers or nominees. Completed
Subscription Certificates must be sent together with proper payment of the
Estimated Subscription Price for all Shares subscribed for in the Primary
Subscription and the Over-Subscription Privilege to the Subscription Agent by
one of the methods described below. Alternatively, Notices of Guaranteed
Delivery
13
<PAGE>
may be sent by brokerage firms and custodian banks and trust companies
exercising Rights on behalf of Exercising Rights Holders whose Shares are held
by such institutions by facsimile to (781) 794-6352 to be received by the
Subscription Agent prior to 5:00 p.m., Eastern time, on the Expiration Date.
Facsimiles should be confirmed by telephone at (781) 794-6388. The Fund will
accept only properly completed and executed Subscription Certificates actually
received at any of the addresses listed below, prior to 5:00 p.m., Eastern
time, on the Expiration Date or by the close of business on the third business
day after the Expiration Date following timely receipt of a Notice of
Guaranteed Delivery. See "Payment for Shares" below.
(1) BY FIRST CLASS MAIL:
c/o Boston EquiServe
P.O. Box 9573
Boston, Massachusetts 02205-9573
(2) BY OVERNIGHT COURIER:
c/o Boston EquiServe
40 Campanelli Drive
Braintree, Massachusetts 02184
(3) BY HAND:
c/o Boston EquiServe
100 Williams Street-Galleria
New York, New York 10038
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Shareholders," will be mailed promptly following the
Record Date to Record Date Shareholders or, if a shareholder's Shares are held
by Cede or any other depository or nominee on their behalf, to Cede or such
depository or nominee. Rights may be exercised by completing and signing the
Subscription Certificate that accompanies this Prospectus and mailing it in
the envelope provided, or otherwise delivering the completed and signed
Subscription Certificate to the Subscription Agent, together with payment in
full for the Shares to be purchased at the Estimated Subscription Price by the
Expiration Date. Rights may also be exercised by contacting your broker, bank
or trust company, which can arrange, on your behalf, to guarantee delivery of
payment and delivery of a properly completed and executed Subscription
Certificate pursuant to a Notice of Guaranteed Delivery by the close of
business on February 5, 1999, the third business day after the Expiration
Date. A fee may be charged by the broker, bank or trust company for this
service. Fractional Shares will not be issued upon the exercise of Rights.
Completed Subscription Certificates must be received by the Subscription Agent
prior to 5:00 p.m., Eastern time, on the Expiration Date at one of the
addresses set forth above (unless the guaranteed delivery procedures are
complied with as described below under "Payment for Shares"). Exercising
Rights Holders will have no right to rescind their subscriptions after receipt
of their payment for Shares by the Subscription Agent.
SHAREHOLDERS WHO ARE RECORD OWNERS. Shareholders who are record owners can
choose between two options to exercise their Rights, as described below under
"Payment for Shares." If time is of the essence,
14
<PAGE>
option (2) under "Payment for Shares" below will permit delivery of the
Subscription Certificate and payment after the Expiration Date, but such
delivery of the Subscription Certificate must be accompanied by a Notice of
Guaranteed Delivery from a financial institution meeting certain requirements.
SHAREHOLDERS WHOSE SHARES ARE HELD BY A NOMINEE. Shareholders whose Shares
are held by a nominee, such as a bank, broker or trustee, must contact that
nominee to exercise their Rights. In such case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods described below under "Payment for Shares."
NOMINEES. Nominees who hold Shares for the account of others should notify
the beneficial owners of such Shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the
Subscription Certificate and submit it to the Subscription Agent with the
proper payment as described below under "Payment for Shares."
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
Shareholder Communications Corporation (the "Information Agent") at its
telephone number and address listed below:
17 State Street, 27th Floor
New York, New York 10004
Toll Free: (800) 733-8481, ext. 486
Shareholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated
to be $30,000, excluding reimbursement for its out-of-pocket expenses related
to the Offer.
PAYMENT FOR SHARES
Shareholders who wish to acquire Shares pursuant to the Offer may choose
between the following methods of payment:
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment (based on Estimated Subscription Price) for the
Shares acquired in the Primary Subscription and any additional Shares
subscribed for pursuant to the Over-Subscription Privilege to the
Subscription Agent. A subscription will be accepted when payment,
together with a properly completed and executed Subscription Certificate,
is received by the Subscription Agent's office at one of the addresses
set forth above no later than 5:00 p.m., Eastern time, on the Expiration
Date. The Subscription Agent will deposit all checks and money orders
received by it for the purchase of Shares into a segregated interest-
bearing account (the interest from which will accrue to the benefit of
the Fund) pending proration and distribution of Shares. A PAYMENT
PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK
DRAWN ON A BANK OR BRANCH LOCATED IN THE UNITED STATES, MUST BE PAYABLE
TO THE HIGH YIELD PLUS FUND, INC. AND MUST ACCOMPANY A PROPERLY COMPLETED
AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE
TO BE ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL COLLECTION
OF CHECKS BY 5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE
UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, SHAREHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
(2) Alternatively, an Exercising Rights Holder may acquire Shares, and
a subscription will be accepted by the Subscription Agent if, prior to
5:00 p.m., Eastern time, on the Expiration Date, the
15
<PAGE>
Subscription Agent has received a Notice of Guaranteed Delivery by
facsimile (telecopy) or otherwise FROM A FINANCIAL INSTITUTION THAT IS A
MEMBER OF THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM, THE STOCK
EXCHANGE MEDALLION PROGRAM OR THE NEW YORK STOCK EXCHANGE MEDALLION
SIGNATURE PROGRAM guaranteeing delivery of (i) payment of the Estimated
Subscription Price for the Shares subscribed for in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege, (ii) payment in full of any additional
amount required to be paid if the actual Subscription Price is in excess
of the Estimated Subscription Price, and (iii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not honor
a Notice of Guaranteed Delivery unless a properly completed and executed
Subscription Certificate and full payment for the Shares based on the
Estimated Subscription Price is received by the Subscription Agent by the
close of business on February 5, 1999, the third business day after the
Expiration Date.
On a date within eight business days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising
Rights Holder (or, if Shares are held by Cede or any other depository or
nominee, to Cede or such other depository or nominee) a confirmation showing
(i) the number of Shares purchased pursuant to the Primary Subscription, (ii)
the number of Shares, if any, acquired pursuant to the Over-Subscription
Privilege, (iii) any excess to be refunded by the Fund to such Exercising
Rights Holder as a result of payment for Shares pursuant to the Over-
Subscription Privilege which the Exercising Rights Holder is not acquiring and
(iv) any additional amount payable by such Exercising Rights Holder to the
Fund or any excess to be refunded by the Fund to such Exercising Rights
Holder, in each case, based on the actual Subscription Price as determined on
the Expiration Date. Any additional payment required from Exercising Rights
Holders must be received by the Subscription Agent within seven business days
after the Confirmation Date. Any excess payment to be refunded by the Fund to
an Exercising Rights Holder will be mailed by the Subscription Agent as
promptly as practicable. All payments by an Exercising Rights Holder must be
in U.S. dollars by money order or check drawn on a bank or branch located in
the United States and payable to THE HIGH YIELD PLUS FUND, INC.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY
SUBSCRIPTION OR OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY
AMOUNTS DUE BY THE TENTH BUSINESS DAY AFTER THE CONFIRMATION DATE, THE
SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING
ACTIONS: (i) FIND OTHER EXERCISING RIGHTS HOLDERS TO PURCHASE SUCH SUBSCRIBED
AND UNPAID FOR SHARES; (ii) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD
THE PURCHASE OF THE GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE ACQUIRED BY
SUCH HOLDER UPON EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION
PRIVILEGE, AND/OR (iii) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH
IT MAY BE ENTITLED, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET OFF
AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED
SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED
TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR
MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole discretion may
16
<PAGE>
waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been received
or accepted until all irregularities have been waived or cured within such
time as the Subscription Agent determines in its sole discretion.
The Subscription Agent will not be under any duty to give notification of
any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION
AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights will be
listed for trading on the Exchange. The Fund will use its best efforts to
ensure that an adequate trading market for the Rights will exist, although no
assurance can be given that a market for the Rights will develop. It is
anticipated that the Rights will trade on the Exchange on a when-issued basis
commencing on or about January 5, 1999 until approximately January 7, 1999 and
on a regular way basis thereafter until and including February 1, 1999, the
last business day prior to the Expiration Date.
SALES THROUGH SUBSCRIPTION AGENT AND DEALER-MANAGER. Record Date
Shareholders who do not wish to exercise any or all of their Rights may
instruct the Subscription Agent to sell any unexercised Rights through or to
the Dealer-Manager. Subscription Certificates representing the Rights to be
sold by or to the Dealer-Manager must be received by the Subscription Agent on
or before January 29, 1999 (or if the Offer is extended, by two business days
prior to the Expiration Date). Upon the timely receipt by the Subscription
Agent of appropriate instructions to sell Rights, the Subscription Agent will
request the Dealer-Manager either to purchase or to use its best efforts to
complete the sale and the Subscription Agent will remit the proceeds of sale,
net of commissions, to the selling Record Date Shareholder. Any commissions on
sales of Rights will be paid by the selling Record Date Shareholder. If the
Rights can be sold, sales of such Rights will be deemed to have been effected
at the weighted-average price received by the Dealer-Manager on the day such
Rights are sold. The sale price of any Rights sold to the Dealer-Manager will
be based upon the then current market price for the Rights, less amounts
comparable to the usual and customary brokerage fees. The Dealer-Manager will
also attempt to sell all Rights which remain unclaimed as a result of
Subscription Certificates being returned by the postal authorities to the
Subscription Agent as undeliverable as of the fourth business day prior to the
Expiration Date. Such sales will be made net of commissions on behalf of the
nonclaiming Record Date Shareholders. The Subscription Agent will hold the
proceeds from those sales for the benefit of such nonclaiming Record Date
Shareholders until such proceeds are either claimed or escheat. There can be
no assurance that the Dealer-Manager will purchase or be able to complete the
sale of any such Rights, and neither the Fund nor the Dealer-Manager has
guaranteed any minimum sales price for the Rights.
OTHER TRANSFERS. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights) may
be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register such
portion of the Rights evidenced thereby in the name of the transferee and to
issue a new Subscription Certificate to the transferee evidencing such
transferred Rights. In such event, a new Subscription Certificate evidencing
the balance of the Rights, if any, will be issued to the Record Date
Shareholder or, if the Record Date Shareholder so instructs, to an additional
transferee. The signature on the Subscription Certificate must correspond with
the name as written upon the face of the Subscription Certificate in every
particular, without alteration or enlargement, or any change whatsoever. A
signature guarantee must be provided by an eligible financial institution as
defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), subject to the standards and procedures adopted by the Fund.
17
<PAGE>
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five business days for (i) the transfer
instructions to be received and processed by the Subscription Agent; (ii) a
new Subscription Certificate to be issued and transmitted to the transferee or
transferees with respect to transferred Rights, and to the transferor with
respect to retained Rights, if any; and (iii) the Rights evidenced by such new
Subscription Certificate to be exercised or sold by the recipients thereof.
Neither the Fund nor the Subscription Agent nor the Dealer-Manager shall have
any liability to a transferee or transferor of Rights if Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.
Except for the fees charged by the Subscription Agent, Information Agent
and Dealer-Manager (which will be paid by the Fund), all commissions, fees and
other expenses (including brokerage commissions and transfer taxes) incurred
or charged in connection with the purchase, sale or exercise of Rights will be
for the account of the transferor of the Rights, and none of such commissions,
fees or expenses will be paid by the Fund, the Subscription Agent, the
Information Agent or the Dealer-Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (and the Over-Subscription
Privilege) may be effected through, the facilities of DTC (Rights exercised
through DTC are referred to as "DTC Exercised Rights").
DISTRIBUTION ARRANGEMENTS
A.G. Edwards & Sons, Inc., which is a St. Louis, Missouri broker-dealer and
member of the National Association of Securities Dealers, Inc., will act as
the Dealer-Manager for the exercise of the Rights and the Over-Subscription
Privilege. Under the terms and subject to the conditions contained in the
Dealer-Manager Agreement dated on or about the date hereof (the "Dealer-
Manager Agreement"), the Dealer-Manager will provide financial advisory and
marketing services in connection with the Offer and will solicit the exercise
of Rights and participation in the Over-Subscription Privilege. The Offer is
not contingent upon any number of Rights being exercised. The Fund has agreed
to pay the Dealer-Manager a fee for its financial advisory, marketing and
soliciting services equal to (a) 3.50% of the Subscription Price per Share for
Shares issued pursuant to the exercise of the Rights and the Over-Subscription
Privilege less (b) a $25,000 retainer fee paid to the Dealer-Manager by the
Fund pursuant to a letter agreement between the Fund and the Dealer-Manager.
The Dealer-Manager will reallow soliciting fees to broker-dealers who have
entered into a Soliciting Dealer Agreement with the Dealer-Manager equal to
2.50% of the Subscription Price per Share for Shares issued pursuant to the
exercise of the Rights and the Over-Subscription Privilege.
In addition, the Fund may reimburse the Dealer-Manager up to an aggregate
of $50,000 for its out-of-pocket costs and expenses incurred in connection
with the Offer; provided, however, that if fewer than 1,900,000 Shares are
issued upon the exercise of Rights in connection with the Offer, such
reimbursement will be limited to a maximum of $25,000. The Fund has agreed to
indemnify the Dealer-Manager or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act under certain
circumstances. The Dealer-Manager Agreement also provides that the Dealer-
Manager will not be subject to any liability to the Fund in rendering the
services contemplated by such Agreement except for any act of bad faith,
willful misconduct or gross negligence of the Dealer-Manager or reckless
disregard by the Dealer-Manager of its obligations and duties under such
Agreement.
The Fund has agreed not to offer or sell, or enter into any agreement to
sell, any Shares, except (a) through the Dealer-Manager or (b) through the
Dividend Reinvestment Plan, for a period of six months after the effective
date of the Offering.
DELIVERY OF SHARE CERTIFICATES
Except as described herein, certificates representing Shares acquired in
the Primary Subscription and representing Shares acquired pursuant to the
Over-Subscription Privilege will be mailed promptly after the expiration of
the Offer once full payment for such Shares has been received and cleared.
Participants in the
18
<PAGE>
Fund's Dividend Reinvestment Plan (the "Plan") will have any Shares acquired
in the Primary Subscription and pursuant to the Over-Subscription Privilege
credited to their shareholder dividend reinvestment accounts in the Plan.
Participants in the Plan wishing to exercise Rights for the Shares held in
their accounts in the Plan must exercise such Rights in accordance with the
procedures set forth above. Shareholders whose Shares are held of record by
Cede or by any other depository or nominee on their behalf or their broker-
dealer's behalf will have any Shares acquired in the Primary Subscription
credited to the account of Cede or such other depository or nominee. Shares
acquired pursuant to the Over-Subscription Privilege will be certificated and
certificates representing such Shares will be sent directly to Cede or such
other depository or nominee. Stock certificates will not be issued for Shares
credited to Plan accounts.
FOREIGN SHAREHOLDERS
SUBSCRIPTION CERTIFICATES WILL NOT BE MAILED TO RECORD DATE SHAREHOLDERS
WHOSE RECORD ADDRESSES ARE OUTSIDE THE UNITED STATES (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders").
Foreign Record Date Shareholders will be sent written notice of the Offer. The
Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Shareholders' accounts until
instructions are received to exercise or sell the Rights. If no instructions
have been received by 5:00 p.m., Eastern time, on January 28, 1999, which is
three business days prior to the Expiration Date, the Rights of those Foreign
Record Date Shareholders will be transferred by the Subscription Agent to the
Dealer-Manager, who will either purchase the Rights or use its best efforts to
sell the Rights. The net proceeds, if any, from the sale of those Rights by or
to the Dealer-Manager will be remitted to Foreign Record Date Shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The U.S. federal income tax consequences to holders of Shares with respect
to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will not
result in taxable income to them, nor will they realize taxable income as
a result of the exercise of the Rights. No loss will be realized if
Rights expire without being exercised.
2. The basis of a Right to a Record Date Shareholder who exercises or
sells the Right will be (a) zero, if the Right's fair market value on the
distribution date is less than 15% of the fair market value on that date
of the Share with regard to which it is issued (unless the holder elects
with respect to all Rights received, by filing a statement with his or
her timely filed federal income tax return for the year in which the
Rights are received, to allocate the basis of the Share between the Right
and the Share based on their respective fair market values on that date),
or (b) a portion of the basis in the Share based upon those respective
fair market values, if the Right's fair market value on that date is 15%
or more of the Share's fair market value on that date. The basis of a
Right to a Record Date Shareholder who allows the Right to expire will be
zero, and the basis to anyone who purchases a Right in the market will be
its purchase price.
3. An Exercising Rights Holder's basis for determining gain or loss on
the sale of a Share acquired on the exercise of Rights will be equal to
the sum of the Record Date Shareholder's basis in the Rights, if any,
plus the Subscription Price per Share. An Exercising Rights Holder's gain
or loss recognized on the sale or exchange of such a Share will be
capital gain or loss if the Share was then held as a capital asset and
will be long-term capital gain or loss if the Share was held for more
than one year.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if its holder provides the Fund with
either an incorrect taxpayer identification number or no number at all or
fails to certify that he or she is not subject to such withholding.
19
<PAGE>
The foregoing is only a general summary of the material U.S. federal income
tax consequences of the Offer under the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), and Treasury regulations presently in effect that are
generally applicable to (1) Record Date Shareholders that are "United States
persons" within the meaning of the Code and (2) any other Record Date
Shareholder that would be subject to U.S. federal income tax on the sale or
exchange of the Shares acquired on exercise of the Rights, and does not cover
foreign, state or local taxes. The Code and those regulations are subject to
change by legislative or administrative action, which may be retroactive.
Record Date Shareholders and Exercising Rights Holders should consult their
tax advisers regarding specific questions as to federal, state, local or
foreign taxes. See "Federal Taxation."
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Commission's registration form, undertaken
to suspend the Offer until it amends this Prospectus if, subsequent to the
effective date of this Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date. In such
event, the Expiration Date would be extended up to an aggregate of 45 days
from the Expiration Date, and the Fund would notify Exercising Rights Holders
of any such decline and thereby permit them to cancel their exercise of
Rights.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are tax-deferral arrangements, such as plans qualified
under Code section 401(a) (including corporate savings plans, 401(k) plans,
and Keogh plans of self-employed individuals), individual retirement accounts
under Code section 408(a) ("IRAs"), Roth IRAs under Code section 408A, and
custodial accounts under Code section 403(b) (collectively, "Retirement
Plans"), should be aware that additional contributions of cash to a Retirement
Plan (other than permitted rollover contributions or trustee-to-trustee
transfers from another Retirement Plan) in order to exercise Rights, when
taken together with contributions previously made, may result in, among other
things, excise taxes for excess or nondeductible contributions or the
Retirement Plan's loss of its tax-favored status. Furthermore, the sale or
transfer of Rights may be treated as a distribution or result in other adverse
tax consequences. In the case of Retirement Plans qualified under Code section
401(a) and certain other Retirement Plans, additional cash contributions could
cause the maximum contribution limitations of Code section 415 or other
qualification rules to be violated.
Retirement Plans and other tax-exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Code section 511. If any portion of an IRA or a
Roth IRA is used as security for a loan, the portion so used is also treated
as distributed to the IRA or Roth IRA owner, which may result in current
income taxation and penalty taxes.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
contains fiduciary responsibility requirements, and ERISA and the Code contain
prohibited transaction rules that may apply to the exercise of Rights by
Retirement Plans. Retirement Plans that are not subject to ERISA (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights. Due to the complexity of these
rules and the penalties for noncompliance, shareholders that are Retirement
Plans should consult with their counsel and other advisers regarding the
consequences of their exercise of Rights under ERISA, the Code, and, where
applicable, state law.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the Estimated Subscription
Price of $7.35 per Share, the net proceeds of the Offer are estimated to be
$26,604,334 after payment of the Dealer-Manager's fees, and the estimated
offering expenses. These expenses will be borne by the Fund and will reduce
the net asset value of the Fund's shares. The Adviser anticipates that
investment of substantially all of such net proceeds in accordance
20
<PAGE>
with the Fund's investment objectives and policies will take up to sixty days
from their receipt by the Fund, depending on market conditions and the
availability of appropriate securities for purchase, but in no event is such
investment expected to take longer than six months. Pending such investment,
the proceeds will be held in high quality short-term money market instruments
and U.S. Government securities (which term includes obligations of the U.S.
Government, its agencies or instrumentalities).
THE FUND
The Fund is a diversified, closed-end management investment company
registered under the 1940 Act. The Fund's primary investment objective is to
provide a high level of current income. A secondary objective is capital
appreciation, but only when consistent with its primary objective. An
investment in the Fund may not be appropriate for all investors, and no
assurance can be given that the Fund's investment objectives will be achieved.
Under normal market conditions, at least 65% of the Fund's total assets are
invested in high yield debt securities rated in the medium and lower
categories by established rating agencies, consisting principally of
securities rated BBB to C by Standard & Poor's Rating Group ("S&P") or Baa to
C by Moody's Investors Service, Inc. ("Moody's") or non-rated high yield debt
securities deemed by the Adviser to be of comparable quality. Securities rated
BB or lower by S&P or Ba or lower by Moody's are commonly referred to as "high
yield, high risk" securities or "junk bonds." Such securities generally are
regarded by the Rating Agencies as significantly more speculative with respect
to capacity to pay interest and repay principal in accordance with the terms
of the obligation and more likely to default than higher quality debt
securities. (See Appendix A for a description of Bond Ratings.) The Fund also
may invest in high yield debt securities issued by foreign companies, as well
as securities issued or guaranteed by foreign governments, quasi-governmental
entities, governmental agencies, supranational entities and other governmental
entities. No more than 20% of the Fund's total assets will be invested in non-
U.S. dollar-denominated foreign debt or equity. However, no restriction exists
on the Fund's exposure to U.S. dollar denominated foreign issues. The Fund
also may invest in foreign securities issued or guaranteed by companies or
governments located in countries whose economies or securities markets are not
yet highly developed. Investment in lower rated securities and foreign
securities involves special risks. See "Investment Policies and Limitations"
and "Risk Factors and Special Considerations."
The Fund may invest up to 25% of its total assets in securities that are
restricted as to disposition under the federal securities laws or are
otherwise not readily marketable, as well as in repurchase agreements maturing
in more than seven days. However, no more than 10% of the Fund's total assets
will be invested in any one private offering. Securities eligible for resale
in accordance with Rule 144A under the Securities Act of 1933, as amended,
that have legal or contractual restrictions on resale but are otherwise liquid
("Rule 144A Securities") are not subject to this 25% limitation. The Adviser
monitors the liquidity of such restricted securities under the supervision of
the Board of Directors. The Fund may invest in securities that are in the
lower rating categories or non-rated securities, but only when the Adviser
believes that the potential return from such investments remains attractive
despite the risks involved. In addition to investing in such lower rated debt
securities, the Fund also may invest in equity and other debt securities;
hybrid securities having debt and equity characteristics; and certain options
and futures contracts.
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies do not issue
securities that are redeemable at a shareholder's option, and they have a
relatively fixed capital base, whereas open-end investment companies have a
variable capital base since they issue securities that are redeemable at net
asset value at any time at the option of the shareholder and typically engage
in a continuous offering of their shares. Accordingly, open-end investment
companies are subject to periodic asset in-flows and out-flows that can
complicate portfolio management. Closed-end investment companies do not face
the prospect of having to liquidate portfolio holdings to satisfy redemptions
at the option of shareholders or having to maintain
21
<PAGE>
cash positions to meet the possibility of such redemptions. The Fund will,
however, be required to have sufficient cash or cash equivalents to meet
interest payments under the Credit Agreement described below. See "Description
of Credit Agreement" and "Description of Shares of Common Stock."
The Fund entered into the Credit Agreement with BankBoston, pursuant to
which BankBoston has agreed to make loans to the Fund from time to time. From
1989 to 1993 the Fund was a party to a credit agreement with another bank. The
maximum amount of BankBoston's current commitment to make loans under the
Credit Agreement is $35 million. The Fund pays a commitment fee of 0.09% per
annum of the unused portion of the $35 million available under the Credit
Agreement to BankBoston. During each of the following fiscal years, the
average amount outstanding under the Credit Agreement was as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 10/31/93 TO 3/31/94
---- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
$21,027,397 $17,494,505 $16,095,628 $23,931,319 $20,387,765
</TABLE>
The Credit Agreement requires the Fund to comply with certain asset
coverage and investment limitations. See "Description of Credit Agreement."
The Fund may seek to increase the amount it may borrow under the Credit
Agreement or other credit facilities following completion of the rights
offering to the maximum amount then permissible under the 1940 Act, but no
formal decision has been made and there can be no assurance as to the timing
or utilization of such additional facilities.
The Fund's use of leverage generally has increased the income yield of the
Fund. In order to maintain the same degree of leverage currently utilized by
the Fund, the Fund will need to increase the amount of its borrowings after
the conclusion of the offering. If the Fund does not maintain the same degree
of leverage after the offering, it is possible that the Fund's relative income
yield would decrease. The Fund's income level, however, is subject to, but not
limited to, the following factors: the yield on available investment
opportunities, loss rates on existing issues held in the portfolio,
reinvestment of interest payments and capital gains, and the yield difference
between the cost of the borrowings and income on securities purchased for
investment as well as the amount of overall borrowings and the interest
thereon.
The Fund was organized as a corporation under the laws of the State of
Maryland on April 13, 1988 and commenced operations on April 22, 1988. The
Fund's principal office is located at Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077. The Adviser is registered as an
investment adviser with the Commission under the Investment Advisers Act of
1940, as amended. See "The Adviser."
INVESTMENT POLICIES AND LIMITATIONS
The Fund's investment objectives are fundamental policies and may not be
changed without a vote of the holders of a majority of the Fund's outstanding
voting securities. As defined by the 1940 Act, a majority of the Fund's
outstanding voting securities is the lesser of (a) more than fifty percent of
its outstanding voting securities or (b) sixty-seven percent or more of the
voting securities present at a meeting at which more than fifty percent of the
outstanding voting securities are present or represented by proxy. The other
policies of the Fund, unless noted otherwise, are nonfundamental and may be
changed by the Board of Directors. There is no assurance that the Fund will
achieve its objectives.
HIGH YIELD DEBT SECURITIES
Securities ratings by Moody's and S&P represent the opinions of those
agencies at the time of rating and as such are relative and subjective, and
are not absolute, standards of quality. Although the Adviser will consider
securities ratings when making investment decisions with respect to high yield
debt securities, it will perform its own investment analysis to ensure, to the
extent possible, that the planned investment is sound. The Adviser's
22
<PAGE>
analysis may include consideration of the issuer's experience and managerial
strength, changing financial condition, borrowing requirements or debt
maturity schedules and responsiveness to changes in business conditions and
interest rates. The Adviser may also consider relative values based on
anticipated cash flow, interest or dividend coverage, asset coverage and
earnings prospects. Because of the greater number of investment considerations
involved in investing in high yield debt securities, the achievement of the
Fund's objectives depends more on the Adviser's research abilities than would
be the case if it were investing primarily in securities in the higher rating
categories.
High yield debt securities, including those in which the Fund may invest,
are subject to greater risk of loss of principal and interest than higher
rated securities, and are especially subject to adverse changes in general
economic conditions, the industries in which the issuers are engaged and to
changes in the financial condition of the issuers. High yield debt often is
subordinated and unsecured. As a result, in the event of default, a holder may
be precluded, either by the terms of the instrument or by virtue of its
subordinated status, from recovering a portion or all of its investment on a
timely basis. In addition, compared with more highly rated instruments,
issuers of high yield debt securities typically have a more highly leveraged
capital structure than issuers of higher rated securities. The Adviser
believes that high yield debt securities, while subject to the risks described
above, also offer the potential for attractive returns and intends to invest
in those securities that, in the Adviser's opinion, offer meaningful risk-
adjusted return potential. The Fund invests in securities issued by a wide
range of companies in a number of industries in order to reduce portfolio
sensitivity to any one company or industry. There is no guarantee of the
success of the Fund's investment approach. Securities issued by foreign
issuers may be subject to additional risks. See "Risk Factors and Special
Considerations--Foreign Securities."
Changes in market interest rates will affect the value of the Fund's
investments and its net asset value since, as with all debt securities, the
prices of such investments generally increase when interest rates decline and
decrease when interest rates rise. Although many high yield debt securities
have been issued with maturities of approximately 7-12 years, the effective
maturities of such securities purchased by the Fund may be more or less than
that at the time of purchase. Prices of longer-term debt securities generally
increase or decrease more sharply than those of shorter-term debt securities
in response to interest rate changes. High yield debt securities may also be
sensitive to equity market valuations, reflecting the outlook for general
corporate health. A significant downturn in equity prices could potentially
cause price depreciation in the high yield securities market.
High yield debt securities for purposes of Fund policies primarily consist
of the following:
-- Straight fixed-income debt securities. These include bonds and other
debt obligations which bear a fixed or variable rate of interest
payable at regular intervals and have a fixed or resettable maturity
date. The particular terms of such securities vary and may include
features such as call provisions and sinking funds.
-- Zero-coupon debt securities. These bear no interest obligation but
are issued at a discount from their value at maturity. When held to
maturity, their entire return equals the difference between their
issue price and their maturity value.
-- Zero-fixed coupon debt securities. These are zero-coupon debt
securities that convert on a specified date to interest-bearing debt
securities.
Prices of non-cash-paying instruments may be more sensitive to changes in
the issuer's financial condition, fluctuations in interest rates and market
demand/supply imbalances than cash-paying securities with similar credit
ratings. In addition, the non-cash interest income earned on such instruments
is included in investment company taxable income, thereby increasing the
minimum required distributions to shareholders (without providing the
corresponding cash flow with which to pay the distributions). See "Taxation."
The Adviser will weigh these concerns against the expected total returns for
such instruments.
23
<PAGE>
The Fund may invest in other high yield debt securities that may be
developed in the future, based on the Adviser's determination that such
securities have characteristics and ratings consistent with those described
above and would further the Fund's investment objectives and policies.
-- Restricted Securities. The Fund may invest up to 25% of its total
assets in securities that are restricted as to disposition under the
federal securities laws or otherwise not readily marketable,
including repurchase agreements maturing in more than seven days.
However, no more than 10% of the Fund's total assets will be
invested in any one private offering. Securities eligible for resale
in accordance with Rule 144A under the Securities Act that have
legal or contractual restrictions on resale but are otherwise liquid
are not subject to this limitation. The primary risk associated with
restricted securities is that the Fund will not be able to dispose
of a restricted security at the desired price at the time it wishes
to make such disposition. In addition, such securities often sell at
a discount from liquid and freely-tradeable securities of the same
class or type, although they usually are purchased by the Fund at an
equivalent discount which estimates the yield likely to be earned by
the Fund during the period such securities are held by the Fund.
Such securities may also be more difficult to price accurately. The
Adviser monitors the liquidity of such restricted securities under
the supervision of the Board of Directors.
-- Foreign Securities. The Fund may invest in U.S. and non-U.S. dollar-
denominated foreign high yield debt securities issued by foreign
companies and issued or guaranteed by foreign governments, quasi-
governmental entities, governmental agencies, supranational entities
and other governmental entities. No more than 20% of the Fund's
total assets will be invested in non-U.S. dollar-denominated foreign
debt or equity. No restriction exists on the Fund's exposure to U.S.
dollar-denominated foreign issues.
OTHER INVESTMENTS
Other Debt Securities. The Fund may invest in rated and non-rated debt
securities other than the high yield debt securities discussed above. These
other securities may include debt securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, and debt securities rated A or
higher by Moody's or S&P, or non-rated securities deemed by the Adviser to be
of comparable quality. When the Adviser believes the potential return
outweighs the risks involved, the Fund also may invest in debt securities
rated below C by S&P or C by Moody's (indicating that the security is in
default and interest payments and/or principal payments are in arrears) or
non-rated securities with similar characteristics; however, the Adviser does
not anticipate investing more than 5% of the Fund's total assets in such
securities. See Appendix A for a description of ratings.
The Fund also may invest in alternate debt instruments including, but not
limited to:
-- Convertible preferred stock and convertible bonds;
-- Bonds accompanied by warrants or options for equity securities; and
-- Payment-in-kind securities, which pay dividends or interest in new
securities of the issuer instead of cash.
Investments in alternate debt instruments generally will be considered when
the Adviser believes that the yield combined with the capital appreciation
potential will equal or exceed returns available from straight fixed-income
debt securities.
Equity Investments. As described above, the Fund may purchase equity
securities, i.e., common or preferred stock. The Fund also may purchase common
stock where the issuers are involved in recapitalizations or corporate
restructurings, and the Adviser expects the common stock shortly will be
exchanged for debt securities directly from the issuer on terms more
attractive than subsequently available on the open market. In the event an
opportunity to exchange the stock does not materialize as expected, the Fund
would seek to dispose of the common stock in an orderly manner.
24
<PAGE>
The Fund also may invest in preferred stock (including that of foreign
issuers subject to the applicable limits described above in "Foreign
Securities") when the Adviser, weighing the security's status in the issuer's
credit structure, believes the expected return is attractive relative to
alternative investments.
Notwithstanding the foregoing, when in the Adviser's opinion market
conditions warrant a temporary defensive investment strategy, the Fund may
invest without limit in high-quality money market instruments, including
commercial paper of domestic and foreign corporations, certificates of
deposit, bankers' acceptances and other obligations of banks, repurchase
agreements and short-term obligations issued or guaranteed by the U.S.
Government, its instrumentalities or agencies. The yield on these securities
will tend to be lower than the yield on other securities purchased by the Fund
in accordance with its investment objectives.
Since the commencement of the Fund's investment operations on April 22,
1988, the Fund has sought to achieve its primary objective of providing a high
level of current income to its shareholders. Through its performance during
this period, the Fund has demonstrated that investing in high yield, high risk
securities on a leveraged basis carries significant risks as well as the
possibility of significant rewards through returns.
The Fund's annual net asset value returns (including reinvested
distributions) for each calendar year since its inception are as follows: 1988
(from April 30, 1988 through December 31, 1988): 6.4%; 1989: -2.4%; 1990: -
9.3%; 1991: 42.2%; 1992: 18.4%; 1993: 22.8%; 1994: -5.1%; 1995: 22.5%; 1996:
12.7%; 1997: 13.0%; 1998 (year to date through September 30, 1998): -12.7%.
Cumulative net asset value return (including reinvested distributions) for the
period beginning on April 30, 1988 through September 30, 1998 was 151.6% (9.3%
annualized). Cumulative total market price return for an investment in the
Shares for the period beginning on April 30, 1988 and ending on September 30,
1998 was 73.3% (5.4% annualized). Past performance is no guarantee of future
results.
The credit ratings of all bonds held by the Fund at September 30, 1998 are
set forth below. This information reflects the composition of the Fund's
assets at September 30, 1998 and is not necessarily representative of the
Fund's holdings currently or at any time in the future.
<TABLE>
<CAPTION>
RATED BY RATED BY
S&P MOODY'S
-------- --------
<S> <C> <C>
BBB/Baa.................................................. 1% 1%
BB/Ba.................................................... 23% 20%
B/B...................................................... 61% 62%
CCC/Caa.................................................. 7% 9%
CC/Ca.................................................... 1% 0%
Nonrated................................................. 6% 7%
--- ---
Subtotal.............................................. 99% 99%
U.S. Governments, equities and others (including cash)... 1% 1%
--- ---
Total................................................. 100% 100%
=== ===
</TABLE>
LEVERAGE AND BORROWING
From time to time, at the Adviser's discretion, the Fund has obtained
investment leverage through bank or other borrowing of up to 33 1/3% of the
Fund's total assets (including the amount borrowed), less all liabilities and
indebtedness other than the bank or other borrowing. This is equivalent to
borrowing up to 50% of the value of the Fund's net assets. Subject to such
limitations as may be specified in applicable margin regulations of the Board
of Governors of the Federal Reserve System, the Fund may engage in such
borrowing currently or in the future by issuing commercial paper or notes or
other evidences of indebtedness, secured by pledge or otherwise, although to
date it has not done so.
25
<PAGE>
The Fund has entered into the Credit Agreement pursuant to which BankBoston
has agreed to make loans to the Fund, from time to time, in an aggregate
amount not to exceed $35 million. See "Description of Credit Agreement." The
Fund may seek to increase the amount it may borrow following completion of the
rights offering to the maximum amount then permissible under the 1940 Act, but
no formal decision has been made.
The Fund will have asset coverage (as defined in the 1940 Act) of not less
than 300% with respect to any borrowings for investment leverage purposes when
made. This allows the Fund to borrow for investment leverage purposes an
amount equal to as much as 50% of the value of its net assets. The Fund may
not, however, repurchase any of its outstanding Shares or pay a dividend
unless the Fund will have asset coverage of not less than 300% with respect to
such borrowings upon completion of the repurchase or payment of the dividend.
In addition to borrowings made as described above, the Fund may also borrow
money for temporary or emergency purposes (e.g., clearance of transactions or
payment of dividends to shareholders) in an amount not exceeding 5% of the
value of the Fund's total assets (not including the amount borrowed).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, the Fund may purchase securities on a when-issued or
delayed delivery basis, i.e., delivery and payment can take place a month or
more after the date of the transaction. The purchase price and the interest
rate payable on the securities are fixed on the transaction date. The
securities so purchased are subject to market fluctuation, and no interest
accrues to the Fund until delivery and payment take place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction and thereafter reflect the
value of such securities in determining its net asset value each day. The Fund
will make commitments for such when-issued transactions only with the
intention of actually acquiring the securities. The Fund's custodian will
maintain, in a separate account of the Fund, liquid debt securities from its
portfolio, marked to market daily and having an aggregate value equal to or
greater than such commitments. On delivery dates for such transactions, the
Fund will meet its obligations from maturities for sales of the securities
held in the separate account and/or from then available cash flow. If the Fund
chose to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of other portfolio obligations,
incur a gain or loss due to market fluctuation.
LENDING SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend up to
30% of its portfolio securities to brokers, dealers, banks or other recognized
institutional borrowers of securities, provided that such loans are callable
at any time by the Fund and are at all times secured by cash or equivalent
collateral that is equal to at least the market value, determined daily, of
the loaned securities. The advantage of such loans is that the Fund continues
to receive the interest and dividends, if any, on the loaned securities, while
at the same time earning a fee or interest from the borrower.
A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms that
the Adviser and the Board of Directors deem to be creditworthy. On termination
of the loan, the borrower is required to return the securities to the Fund,
and any gain or loss in the market price during the loan would inure to the
Fund. The Fund has not engaged in any loans of portfolio securities since its
inception.
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<PAGE>
Since voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finder's, administrative and custodial fees in connection with a loan of its
securities and may share the interest earned on collateral with the borrower.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements involving obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
Pursuant to repurchase agreements, the Fund acquires underlying debt
securities from a member bank of the Federal Reserve System or a Federal
Reserve reporting dealer, subject to the obligation of the seller to
repurchase, and the Fund to resell, the securities at an agreed upon price on
an agreed upon date usually not more than seven days from the date of
purchase. In effect, repurchase agreements are similar to loans extended by
the Fund, secured by the underlying securities. The repurchase agreements
entered into by the Fund will provide, and the Adviser will monitor the value
of the collateral on a continuing basis to ensure, that the underlying
collateral securities at all times will have a value at least equal to the
resale price stated in the agreement. Under all repurchase agreements entered
into by the Fund, the Fund's custodian or its agent must take possession of
the underlying collateral. If the seller defaults, the Fund could suffer a
loss on the sale of the underlying securities or may suffer a loss of
principal and interest if the Fund is treated as an unsecured creditor and is
required to return the underlying securities to the seller's estate.
The Adviser may enter into repurchase agreements on behalf of the Fund.
Such repurchase agreements must conform to certain guidelines and procedures,
designed to minimize the risk of loss to the Fund.
OPTIONS AND FUTURES STRATEGIES
Although it is not the Fund's intention to attempt to achieve its
investment objectives through substantial use of these techniques, the Fund
may seek to protect against the effect of changes in interest rates or equity
market values that are adverse to the present or prospective position of the
Fund, and to enhance returns, by employing certain hedging, yield enhancement
and risk management techniques. These techniques may include the purchase and
sale of options, futures and options on futures on debt or equity securities,
aggregates of debt or equity securities or indices of prices thereof, and
other financial indices. The Fund's ability to engage in these practices will
be limited in accordance with the policies and certain legal considerations
set forth below and may further be restricted by tax considerations (see
"Taxation"). In addition, the ability of the Fund to engage in these
strategies will be limited by a lack of exchange-traded or over-the-counter
options and futures on the high yield debt securities in which the Fund will
primarily invest. Since its inception, the Fund has only utilized these
techniques on an occasional basis.
Options on Securities. The Fund may purchase call and put options, and
write covered call options, on debt and equity securities, aggregates of debt
and equity securities or indices of prices thereof, and other financial
indices. These may include options traded on U.S. securities exchanges and
options traded in U.S. over-the-counter markets.
The Fund may purchase call options on equity securities issued by the
issuer of portfolio debt securities as a component in the creation of
synthetic convertible bonds or synthetic bonds with warrants. The Fund also
may purchase call options on debt securities it intends to acquire in order to
hedge against (and thereby benefit from) anticipated market appreciation in
the price of the underlying securities at limited risk. The Fund may purchase
put options on equity securities issued by the issuer of debt securities held
by the Fund in order to hedge the Fund's exposure to declines in the value of
such debt securities attributable to the credit of the issuer (rather than
increasing interest rates). The Fund may also purchase put options on debt
securities held by the Fund when the Fund believes that a defensive posture is
warranted for all or a portion of its portfolio.
27
<PAGE>
The Fund may write call options on portfolio securities as a partial hedge
(to the extent of the premium received less transaction costs) against a
decline in the value of portfolio securities and in circumstances in which the
Adviser anticipates that the price of the underlying securities will not
increase above the exercise price of the option by an amount greater than the
premium received (less transaction costs) by the Fund. The Fund may write only
"covered" options. "Covered" means that so long as the Fund is obligated as
the writer of a call option, it will own either the underlying securities, or
an option to purchase the same underlying securities having an expiration date
not earlier than the expiration date of the "covered" option and an exercise
price equal to or less than the exercise price of the "covered" option, or
will establish and maintain with its custodian for the term of the option a
segregated account consisting of cash, or other liquid securities having a
value equal to the fluctuating market value of the optioned securities.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected debt securities, the historical values of which have
evidenced a high degree of positive correlation to the historical values of
such portfolio securities. If the Adviser's judgment is correct, changes in
the value of the put options should substantially offset changes in the value
of the portfolio securities being hedged. But the correlation between the two
values may not be as close in these transactions as in transactions in which
the Fund purchases a put option on an underlying security it owns. If the
value of the securities underlying the put options decreases less than the
value of the Fund's portfolio securities, the put options may not provide
complete protection against a decline in the value of the Fund's portfolio
securities below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options
on other carefully selected debt securities the historical values of which
have evidenced a high degree of positive correlation to the historical values
of the debt securities that the Fund intends to acquire. In such circumstances
the Fund will be subject to risks analogous to those summarized immediately
above in the event that the correlation between the value of call options so
purchased and the value of the securities intended to be acquired by the Fund
is not as close as anticipated and the value of the securities underlying the
call options, increases less than the value of the securities to be acquired
by the Fund.
The Fund may also purchase put and call options, and write call options on
securities indices rather than individual securities in order to hedge the
Fund's exposure to systemic market risk (the risk of price fluctuations
affecting the market as a whole or a market sector), as opposed to the risk of
increases or decreases in the value of a particular security. The use of such
options also involves correlation risk analogous to those described in the
preceding two paragraphs.
The Fund will not purchase an option on a security if, as a result, the
value of all outstanding options purchased by the Fund exceeds 5% of the value
of the Fund's total assets. The Fund will not write covered call options on
portfolio securities representing more than 25% of the value of its total
assets.
For a further description of certain characteristics of options on
securities and associated risks, see Appendix B.
Futures and Options Thereon. The Fund will enter into futures contracts and
options thereon only for certain bona fide hedging and risk management
purposes. The Fund may purchase and sell various financial futures contracts
(including interest rate futures contracts and stock index futures contracts)
as well as options thereon. For a description of these instruments, see
Appendix B.
The Fund may sell interest rate futures contacts when it is expected that
interest rates may rise to protect the Fund against a decrease in the value of
debt securities which the Fund holds. Similarly, the Fund may purchase
interest rate futures contracts when it is expected that interest rates may
decline to protect the Fund
28
<PAGE>
against increases in the price of debt securities (caused by declining
interest rates) which the Fund intends to acquire. To the extent the Fund
enters into future contracts for this purpose, it will maintain in a
segregated account with the Fund's custodian assets sufficient to cover the
Fund's obligations with respect to such futures contracts, in an amount equal
to the difference between the fluctuating market value of such futures
contracts and the aggregate value of the initial margin deposited by the Fund
with its custodian with respect to such futures contracts.
As discussed above, the Fund intends to invest primarily in a variety of
high yield debt securities. Futures contracts on such debt securities are not
currently permitted to be traded under applicable law. Accordingly, the Fund
may only hedge its exposure to changes in the value of debt securities which
it owns or intends to acquire as a result of changes in interest rates by
selling or purchasing, as the case may be, futures contracts on government
securities and other debt securities which, in the Adviser's judgment, have
substantial positive correlation in value to the debt securities which the
Fund holds or intends to acquire. There can be no assurance, however, that
changes in the value of such futures contracts will exhibit a high degree of
positive correlation to the value of such securities. Indeed, many high yield
debt securities may trade primarily on the basis of the credit of the issuer
and may be relatively interest rate insensitive. Accordingly, the value of
such securities may increase or decrease at a greater rate than the futures
contracts entered into by the Fund, which may result in losses to the Fund
greater than the losses which the Fund would have incurred but for the attempt
to so hedge its interest rate risk exposure.
Because, as described above, many high yield debt securities trade, like
equity securities, on the basis of the credit of the issuer, it is possible
that marketwide declines in the value of equity securities will adversely
affect the value of the Fund's portfolio securities. In order to hedge the
Fund's exposure to such risk in circumstances where the Adviser anticipates
general equity market declines, the Fund may sell stock index futures
contracts which, in the Adviser's judgment, have a substantial positive
correlation in value to portfolio securities of the Fund. In such
circumstances, there is the risk that the Adviser's judgment may be
incorrect--resulting in losses to the Fund on its stock index futures
positions which may or may not be offset by increases in the value of the
Fund's portfolio--and the additional risk that there is not a substantial
positive correlation between the change in value of the Fund's portfolio and
the change in the value of the stock indices underlying the Fund's short
futures positions.
The Fund also may purchase call options on financial futures contracts to
hedge against an increase in the price of securities it intends to acquire due
to declining interest rates or increasing equity market values. The purchase
of a call option on a futures contract is similar in some respects to the
purchase of a call option on an individual security. Depending on the pricing
of the option compared to either the price of the futures contract upon which
it is based or the price of the underlying securities, it may or may not be
less risky than ownership of the futures contract or underlying securities.
The Fund also may purchase put options on financial futures contracts to
hedge the Fund's portfolio against the risk of rising interest rates or
declining equity market values and consequent reduction in the value of
portfolio securities. The purchase of a put option on a futures contract is
similar to the purchase of a put option on portfolio securities.
The Fund will engage in transactions in financial futures contracts and
options thereon only in each case in accordance with the rules and regulations
of the Commodity Futures Trading Commission, an agency of the U.S. Government
(the "CFTC"), for hedging purposes only and not for speculative purposes.
There are no limitations on the Fund's use of futures contracts and options
on futures contracts beyond the restrictions set forth above and the economic
limitations that are implicit in the use of futures and options on futures
within these restrictions. As CFTC regulations and interpretative positions
change, the Fund reserves the right to engage in additional transactions
and/or commit more of its assets to transactions in futures and options
thereon, as permitted thereunder.
29
<PAGE>
For a further description of certain characteristics of futures contracts
and options thereon and associated risks, see Appendix B.
PORTFOLIO TURNOVER
Under normal market conditions the Fund anticipates that its portfolio
turnover rate will not exceed 100%. However, the Fund may sell portfolio
securities without regard to the length of time that they have been held in
order to take advantage of new investment opportunities or yield
differentials, or because the Fund desires to preserve gains or limit losses
due to changing economic conditions or the financial condition of the issuer.
A higher rate of turnover may result in increased transaction costs to the
Fund. The portfolio turnover rate is computed by dividing the lesser of the
amount of the securities purchased or securities sold (excluding securities
whose maturities at acquisition were one year or less) by the average monthly
value of securities owned during the year. A 100% turnover rate would occur,
for example, if all of the securities held in the Fund's portfolio were sold
and replaced within one year. Since inception, the Fund's portfolio turnover
rate has ranged from 32% to 112%. Turnover may fluctuate due to market
activity and levels of new high yield issuance.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies.
Fundamental policies may not be changed without the approval of a majority of
the Fund's outstanding voting securities as defined above. If a percentage
restriction on investment or use of assets set forth below is adhered to at
the time a transaction is effected, later changes in percentage resulting from
changing values of portfolio securities or amount of total assets will not be
considered a violation of any of the following restrictions.
The Fund may not:
(1) Issue senior securities or borrow money except as described above
under "Leverage and Borrowing." Collateral arrangements with respect to
options, futures contracts and options on futures contracts, and
collateral arrangements with respect to initial and variation margin are
not considered by the Fund to be the issuance of a senior security.
(2) Act as an underwriter except insofar as the Fund may technically
be deemed an underwriter under the Securities Act in selling a restricted
security.
(3) Invest more than 25% of the market or other fair value of its
total assets in securities of issuers in any one industry. For this
purpose the gas, water, electric and telephone utilities each will be
considered separate industries, and "industry" does not include the U.S.
Government.
(4) As to 75% of its total assets invest more than 5% of the market or
other fair value of its total assets in the securities of any one issuer
(other than securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities) or purchase more than 10% of the voting
securities, or more than 10% of any class of securities, of any one
issuer. For purposes of this restriction, all outstanding debt securities
of an issuer are considered as one class, and all preferred stocks of an
issuer are considered as one class.
(5) Purchase or sell real estate or interests in real estate,
interests in oil, gas or mineral leases, commodities or commodity futures
contracts, except that the Fund may purchase and sell futures contracts,
options on futures contracts and securities secured by real estate or
interests therein or issued by companies that invest therein.
(6) Invest for the purpose of exercising control or management of an
issuer.
(7) Purchase securities issued by a registered investment company,
except when such purchase, though not made in the open market, is part of
a plan of merger or consolidation; provided that
30
<PAGE>
the Fund may purchase securities issued by investment companies in
accordance with applicable limits under the 1940 Act in the open market
where no commission or profit to a sponsor or dealer results from such
purchase other than the customary broker's commission, and provided
further that the Fund shall not purchase securities issued by any open-
end investment company.
(8) Sell any security which the Fund does not own unless by virtue of
its ownership of other securities it has at the time of sale a right to
obtain without payment of further consideration securities equivalent in
kind and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions, and further
provided that the Fund may engage in options and futures transactions as
described above under "Options and Futures Strategies."
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
DILUTION
You may experience an immediate dilution of the aggregate net asset value
of your Shares if you do not fully exercise your Rights pursuant to the Offer.
This is because the Subscription Price per Share will likely be less than the
Fund's net asset value per Share on the Expiration Date, and the number of
Shares outstanding after the Offer is likely to increase in a greater
percentage than the increase in the size of the Fund's assets. In addition, if
you do not fully exercise your Rights you should expect that you will, at the
completion of the Offer, own a smaller proportional interest in the Fund than
would otherwise be the case. Such dilution could be substantial. For example,
assuming that all Rights are exercised at the Estimated Subscription Price of
$7.35, expenses associated with the Offer were $1,322,126, and the Fund's net
asset value otherwise remained constant, the Fund's net asset value per Share
on such date would be reduced by approximately $0.13 per Share. Your ability
to transfer your Rights allows you to receive cash for such Rights should you
choose not to exercise them. However, it is not certain that a market for the
Rights will develop, and no assurance can be given as to the value, if any,
that such Rights will have.
RISK OF LEVERAGE
Generally, the Fund borrows money to purchase securities:
(1) When yields on available investments exceed interest rates and
other expenses of related borrowing, or
(2) When unusual market conditions otherwise make it advantageous for
the Fund to increase its investment capacity.
Although borrowing by the Fund creates an opportunity for greater total
returns, it involves special risks and other considerations. For example:
(1) Leveraging will exaggerate any increases or decreases in the net
asset value of Shares and in the yield on the Fund's portfolio.
(2) While the Fund will have a fixed debt to repay, the investments
may decrease or increase in value during the time the borrowing is
outstanding.
(3) Borrowing will create interest expenses for the Fund which may or
may not exceed the income from the securities purchased.
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<PAGE>
(4) If the income from the securities purchased with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund
would be less than if borrowing were not used. Therefore, the amount
available for distribution to shareholders as dividends would be reduced.
(5) Under its current agreement, the Fund pays a commitment fee of
0.09% per annum of the unused portion of the $35 million available under
the Credit Agreement to maintain the line of credit.
In an extreme case, if the Fund's current investment income were not
sufficient to meet interest payments on loans made under its credit agreement,
the Fund could be forced to liquidate certain of its investments at
unfavorable prices, thereby potentially reducing the net asset value
attributable to the Shares.
If the Fund had to sell assets at unfavorable prices in order to maintain
compliance with the 1940 Act, the Fund's income or net asset value per Share
might be more severely reduced than otherwise.
If the issuers of securities held by the Fund default on their payment
obligations, and such defaults depress the market value of the Fund's
portfolio, the Fund's use of leverage may amplify this reduction in market
value.
Loans under the Credit Agreement or other forms of leverage may constitute
a substantial lien and burden on the Shares by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation.
Federal securities law generally does not allow the Fund to make
distributions to shareholders while any senior security representing
indebtedness is outstanding, unless certain requirements are satisfied. It is
generally expected that the Fund will not normally be precluded from making
such distributions.
The following table illustrates the effect of loans made under the Credit
Agreement on a shareholder's return, assuming a Fund portfolio of
approximately $79.5 million, the annual returns set forth in such table,
approximately $31 million of debt outstanding and an annual rate of interest
of 6.23% payable on the debt:
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses Except
Interest) -10% -5% 0% 5% 10%
-------------------------------------------------------------------
Corresponding Return to
Shareholder -16.33% -9.38% -2.43% 4.52% 11.47%
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are
hypothetical and the actual returns to a holder of the Shares may be greater
or less than those appearing in the table.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest a large portion of its assets in certain restricted
securities. To the extent that, for a period of time, qualified institutional
buyers cease purchasing such restricted securities, the Fund's continued
investment in such securities may have the effect of increasing the level of
illiquidity in its investment portfolio.
DISCOUNT FROM NET ASSET VALUE
Shares of closed-end investment companies frequently trade at a market
price which is less than the value of the net assets of the funds. In some
cases, however, shares of closed-end funds may trade above net asset value.
Since the commencement of the Fund's operations, the Shares have traded at
various times in the market above, at and below net asset value.
In addition, the net asset value of the Fund will change with changes in
the value of its portfolio securities. When interest rates decline, the value
of the Fund's portfolio can be expected to rise. Conversely, when interest
rates rise, the value of a fixed-income portfolio can be expected to decline.
32
<PAGE>
FOREIGN SECURITIES
Investments in foreign securities involve certain risks, including:
(1) Political or economic instability in the country in which the
issuer is domiciled;
(2) The difficulty of predicting international trade patterns; and
(3) The possible imposition of exchange controls.
Such risks are heightened because:
(1) There may be less publicly available information about a foreign
company than about a domestic company.
(2) Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable
to domestic companies.
(3) Transactions costs may be higher on foreign securities.
(4) There is generally less governmental regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
(5) With respect to certain foreign countries, there is a possibility
of expropriation, nationalization, confiscatory taxation or diplomatic
developments which could affect investment in those countries.
(6) In the event of a default of any foreign debt obligations, the
Fund may not be able to obtain or to enforce a judgment against the
issuers of such securities.
(7) Interest income from foreign securities issued in local markets
may be subject to withholding taxes imposed by governments in those
markets.
Changes in foreign exchange rates may reduce the U.S. dollar value of the
Fund's foreign investments, to the extent that such investments are
denominated in foreign currencies.
The above risks may be more acute with respect to the Fund's investments in
emerging market countries:
(1) These countries typically have economic and political systems that
are relatively less mature, and often less stable, than those of
developed countries.
(2) These countries may restrict investment by foreigners.
(3) Emerging markets securities may be less liquid, and their prices
may be more volatile, because of the possibility of low or no trading
volume in these securities.
LOWER RATED INVESTMENTS
The Fund is designed for long-term investors. Investors should not rely on
the Fund for their short-term financial needs. The value of the lower quality
securities in which the Fund invests will be affected by:
(1) interest rate levels;
(2) general economic conditions;
(3) specific industry conditions; and
(4) the creditworthiness of the individual issuer.
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<PAGE>
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Adviser
will take into consideration, among other things:
(1) the issuer's financial resources;
(2) the issuer's sensitivity to economic conditions and trends;
(3) the issuer's operating history;
(4) the quality of the issuer's management; and
(5) regulatory matters.
Relative to other debt securities, the values of lower rated debt
securities may be more volatile because:
(1) an economic downturn may more significantly impact their potential
for default; or
(2) the secondary market for such securities may at times be less
liquid or respond more adversely to negative publicity or investor
perceptions, making it more difficult to value or dispose of the
securities.
Lower-rated investments involve certain risks and other considerations. For
example:
(1) The trading market for lower rated securities is generally less
liquid than the market for higher rated securities.
(2) In a period of rising interest rates, the inability of issuers of
debt obligations to pay such obligations could exacerbate any decline in
the Fund's net asset value.
(3) If an issuer of a security containing a redemption or call
provision exercises either provision in a declining interest rate market,
the Fund would be likely to replace the security with a lower-yielding
investment. This could result in a decreased return for shareholders.
(4) An economic downturn or an increase in interest rates could have a
negative effect on the lower rated debt market and on the market value of
such securities held by the Fund.
(5) The credit ratings issued by credit rating services may not fully
reflect the true risks of an investment.
The net asset value of the Fund fluctuates as the general levels of
interest rates fluctuate. The yields and prices of lower rated securities in
which the Fund may invest may tend to fluctuate more than those for higher
rated debt securities.
ADDITIONAL RISK CONSIDERATIONS
The Fund may not achieve its investment objectives.
The Fund's non-fundamental investment policies may be changed without
shareholder approval.
Investment in the Fund should not be considered a complete investment
program and may not be appropriate for all investors. Investors should
carefully consider their ability to assume these risks before making an
investment in the Fund.
34
<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS: DIVIDEND REINVESTMENT PLAN
It is the Fund's current policy, which may be changed by the Board of
Directors, to make monthly distributions to shareholders of net investment
income and to distribute net realized short- and long-term capital gains and
gains from foreign currency transactions at least once each fiscal year. The
effective rates of return to investors in the Fund will depend upon several
factors, including (a) interest rates, (b) maturities and (c) other terms of
securities held by the Fund.
Pursuant to the Dividend Reinvestment Plan ("Plan"), shareholders may elect
to have all distributions of dividends and gains automatically reinvested by
State Street Bank and Trust Company ("Plan Agent") in Shares pursuant to the
Plan. Shareholders who do not participate in the Plan will receive all
distributions in cash paid by check in U.S. dollars mailed directly to the
shareholder of record (or if the Shares are held in street or other nominee
name, then to the nominee) by State Street Bank and Trust Company as dividend
disbursing agent.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or a capital gain distribution, the
participants in the Plan receive the equivalent in Shares valued at the lower
of market price or net asset value determined as of the time of purchase
(generally, the payment date of the dividend or other distribution). Whenever
the market price of the Shares on the payment date equals or exceeds their net
asset value, participants are issued Shares at the higher of net asset value
or 95% of the market price. This discount reflects savings in underwriting and
other costs that the Fund otherwise would incur to raise additional capital.
The Fund will not issue Shares under the Plan below net asset value. If net
asset value exceeds the market price of Shares on the valuation date or if the
Fund declares a dividend or other distribution payable only in cash (i.e., if
the Board of Directors precludes reinvestment in newly-issued Shares for that
purpose), the Plan Agent will, as agent for the participants, receive the cash
payment and use it to buy Shares in the open market, on the Exchange or
elsewhere, for the participants' accounts. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value per
Share, the average per Share purchase price paid by the Plan Agent may exceed
the net asset value per Share, resulting in the acquisition of fewer Shares
than if the dividend or other distribution had been paid in Shares issued by
the Fund.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. When a participant withdraws from the Plan or upon termination
of the Plan as provided below, certificates for whole Shares credited to the
participant's account under the Plan will be issued and a cash payment will be
made for any fraction of a Share credited to the account.
The Plan Agent maintains each shareholder account in the Plan and furnishes
monthly written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant are held by the Plan Agent in non-
certificated form in the name of the participant, and each shareholder's proxy
includes those Shares held pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, that hold
Shares for others who are the beneficial owners, the Plan Agent administers
the Plan on the basis of the number of Shares certified from time to time by
the record shareholders as representing the total amount registered in the
respective record shareholder's name and held for the account of beneficial
owners who participate in the Plan.
There is no charge to participants for reinvesting dividends or capital
gain distributions, except for certain brokerage commissions, as described
below. The Plan Agent's fees for the handling of the reinvestment of dividends
and other distributions are paid by the Fund. There are no brokerage
commissions charged with respect to Shares issued directly by the Fund.
However, each participant pays a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases of Shares
under the Plan.
The automatic reinvestment of dividends or distributions will not relieve
participants of any federal income tax that may be payable thereon.
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<PAGE>
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of
the change sent to all shareholders of the Fund at least 90 days before the
record date for the distribution. The Plan also may be amended or terminated
by the Plan Agent by at least 90 days' written notice to all shareholders of
the Fund. All correspondence concerning the Plan should be directed to the
Plan Agent at P.O. Box 351, Boston, Massachusetts 02101.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The management of the Fund, including general supervision of the duties
performed by the Adviser and the Administrator, is the responsibility of the
Board of Directors. The Directors and officers of the Fund, their addresses
and their principal occupations for at least the past five years are set forth
below.
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH FUND DURING PAST FIVE YEARS
- ---------------- --- --------- -----------------------
<S> <C> <C> <C>
Eugene C. Dorsey........ 71 Director Retired President, Chief Executive
Gateway Center Three Officer and Trustee, Gannett Foundation
100 Mulberry Street (now Freedom Forum); former Publisher,
Newark, NJ 07102-4077 four Gannett newspapers and Vice
President of Gannett Co., Inc.; past
Chairman, Independent Sector,
Washington, D.C. (largest national
coalition of philanthropic
organizations).
Thomas T. Mooney*....... 56 President, Treasurer President, Greater Rochester Metro
Gateway Center Three and Director Chamber of Commerce; former Rochester
100 Mulberry Street City Manager.
Newark, NJ 07102-4077
Douglas H. 59 Director Vice Chairman (since March 1984) and
McCorkindale............ President (since September 1997),
Gateway Center Three Gannett Co., Inc.
100 Mulberry Street
Newark, NJ 07102-4077
Arthur J. Brown......... 49 Secretary Partner, Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., (law firm).
N.W. Washington, DC 20036
Stephanie A. Djinis..... 34 Assistant Secretary Partner, Kirkpatrick & Lockhart LLP.
1800 Massachusetts Ave.,
N.W. Washington, DC 20036
</TABLE>
- ----------------
* Indicates "interested person" of the Fund as defined in the 1940 Act.
36
<PAGE>
DIRECTORS' FEES
For the fiscal year ended March 31, 1998, and the calendar year ended
December 31, 1997, the Directors received the following compensation for
serving as Directors(a):
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FUND COMPLEX FOR THE
FROM FUND FOR THE YEAR CALENDAR YEAR ENDED
DIRECTOR ENDED MARCH 31, 1998 DECEMBER 31, 1997(B)
- -------- ---------------------- -----------------------
<S> <C> <C>
Eugene C. Dorsey(c).............. $4,250 $21,000
Thomas T. Mooney................. $4,250 $21,000
Douglas H. McCorkindale.......... $4,250 $21,000
</TABLE>
- ----------------
(a) The Fund does not currently provide pension or retirement plan benefits
to the Directors.
(b) The Fund Complex is comprised of four investment companies, to which
aggregate compensation relates.
(c) All compensation from the Fund and Fund Complex for the calendar year
ended December 31, 1997 represents deferred compensation. Mr. Dorsey
received aggregate compensation for that period from the Fund and the
Fund Complex, including accrued interest, in the amounts of approximately
$4,389 and $24,287, respectively.
OWNERSHIP OF THE FUND
At December 31, 1998, the officers and Directors of the Fund as a group
owned less than 1% of the outstanding Shares.
At December 31, 1998, DTC, 7 Hanover Square, New York, New York 10004,
owned of record 10,440,971 Shares representing 92% of outstanding Shares.
THE ADVISER
Wellington Management Company, LLP, with its principal offices at 75 State
Street, Boston, Massachusetts 02109, has served as the Fund's investment
adviser since the Fund's inception. The Adviser is a Massachusetts limited
liability partnership of which Robert W. Doran, Duncan M. McFarland and John
R. Ryan are Managing Partners. The Adviser is a registered investment adviser
and professional investment counseling firm which provides investment services
to investment companies, employee benefit plans, endowment funds, foundations
and other institutions and individuals. As of September 30, 1998, the Adviser
had investment management authority over approximately $187 billion of assets,
including $79 billion of fixed income securities of which approximately $6.6
billion represented "high yield" securities. The Adviser and its predecessor
organizations have provided investment advisory services to investment
companies since 1928 and to investment counseling clients since 1960.
Catherine A. Smith, a Senior Vice President of the Adviser, is responsible
for the day-to-day management of the Fund's portfolio. Ms. Smith has served as
the Fund's portfolio manager since the Fund's inception in April of 1988. In
addition to managing the Fund, Ms. Smith serves as the portfolio manager of
several other high yield bond portfolios, including The New America High
Income Fund, Inc., a closed-end management investment company. After receiving
her Bachelor of Arts degree from Harvard College in 1983, Ms. Smith worked as
a securities analyst for Fred Alger Management, Inc. in New York and
subsequently joined Wellington Management in 1985. Ms. Smith is a CFA and a
member of the Boston Security Analysts Society.
Pursuant to an Investment Advisory Agreement dated April 15, 1988, the
Adviser manages the investment and reinvestment of the Fund's assets and
continuously reviews, supervises and administers the
37
<PAGE>
Fund's investment program. The Adviser determines in its discretion the
securities to be purchased or sold, subject to the ultimate supervision and
direction of the Fund's Board of Directors. The Adviser also has discretion to
determine when and to what extent to expand the Fund's investment capacity, by
borrowing as described above in the section captioned "Investment Objectives
and Policies --Leverage and Borrowing." As compensation for its services, the
Adviser receives from the Fund a monthly fee at an annual rate of 0.50% of the
Fund's average weekly net asset value.
The Adviser bears all expenses of its employees and overhead incurred in
connection with its duties under the Investment Advisory Agreement.
The Investment Advisory Agreement was approved by the Fund's shareholders
on April 13, 1988. Continuance of the Investment Advisory Agreement most
recently was approved by the Fund's Board of Directors, including a majority
of the directors who are not parties to the Agreement or "interested persons"
of any such party ("independent directors"), on May 12, 1998. It may continue
thereafter from year to year if specifically approved at least annually by the
Fund's Board of Directors or by a vote of the holders of a majority of the
Fund's outstanding voting securities. In either event, the Investment Advisory
Agreement must also be approved annually by vote of a majority of the
independent directors, cast in person at a meeting called for that purpose.
The Investment Advisory Agreement may be terminated by either party at any
time without penalty upon 60 days' written notice, and will automatically
terminate in the event of its assignment. Termination will not affect the
right of the Adviser to receive payments of any unpaid compensation earned
prior to termination.
The Adviser will not be liable for any error of judgment or for any loss
suffered by the Fund in connection with the performance of its obligations
under the Investment Advisory Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of,
or from reckless disregard by it of its obligations and duties under, such
Agreement, or damages resulting from a breach of fiduciary duty with respect
to receipt of compensation for services.
The services of the Adviser to the Fund are not deemed to be exclusive, and
nothing in the Investment Advisory Agreement prevents the Adviser, or any
affiliate thereof, from providing similar services to other investment
companies and other clients (whether or not their investment objectives and
policies are similar to those of the Fund) or from engaging in other
activities.
Subject to policy established by the Board of Directors of the Fund, the
Adviser is responsible for arranging for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions the Adviser seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. The Fund may invest in
securities traded in the over-the-counter markets and deal directly with the
dealers who make markets in the securities involved, unless a better price or
execution could be obtained by using a broker. Fixed-income securities are
traded principally in the over-the-counter market on a net basis through
dealers acting for their own account and not as brokers. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. While the Adviser generally
will seek reasonably competitive commission rates, payment of the lowest
commission is not necessarily consistent with best results in particular
transactions.
In placing orders with brokers and dealers, the Adviser will attempt to
obtain the best net price and the most favorable execution for orders;
however, the Adviser may, in its discretion, purchase and sell portfolio
securities through brokers and dealers who provide the Adviser or the Fund
with research, analysis, advice and similar services. The research services
provided by broker-dealers may be useful to the Adviser in serving other
clients, but they can also be useful in serving the Fund. Not all of such
services may be used by the Adviser in connection with the Fund. The Adviser
may, in return for research and analysis, pay brokers a higher commission than
may be charged by other brokers, provided that the Adviser determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of the Adviser to the
38
<PAGE>
Fund and its other clients and that the total commission paid by the Fund will
be reasonable in relation to the benefits to the Fund over the long term.
Information and research received from such brokers and dealers will be in
addition to, and not in lieu of, the services required to be performed by the
Adviser under its Investment Advisory Agreement with the Fund, and the
advisory fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services.
The term "brokerage and research services" includes advice as to the value
of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the
performance of accounts; and effecting securities transactions and performing
functions incidental thereto such as clearance and settlement.
The Adviser's investment management personnel evaluate the quality of
research provided by brokers or dealers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection of
brokers or dealers to execute portfolio transactions. However, the Adviser is
unable to quantify the amounts of commission that might be paid as a result of
such research because certain transactions might be effected through brokers
which provide research but which would be selected principally because of
their execution capabilities.
Investment decisions for the Fund and for other investment accounts managed
by the Adviser are made independently of each other in the light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for two or more such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated to accounts according to a formula deemed equitable
to each account. While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Fund is
concerned, in other cases it is believed to be beneficial to the Fund.
The Fund has no obligation to deal with any broker or group of brokers in
the execution of transactions. The Fund contemplates that, consistent with the
policy of obtaining the best net results, the Fund may use Prudential
Securities Incorporated ("Prudential Securities"), an affiliate of the
Administrator, for brokerage transactions. In addition, the Fund has adopted
procedures which permit the Adviser to purchase securities for the Fund from
underwriting syndicates in which Prudential Securities is a syndicate manager
or member, so long as certain conditions are met.
THE ADMINISTRATOR
The Administrator acts as the administrator of the Fund pursuant to an
Administration Agreement with the Fund dated April 15, 1988 ("Administration
Agreement"). Under the terms of the Administration Agreement, the
Administrator provides meeting facilities for the Board of Directors and
shareholders of the Fund and office facilities and personnel to assist the
officers of the Fund in the performance of the following services: overseeing
the determination and publication of the Fund's net asset value; overseeing
maintenance of books and records of the Fund required by Rule 31a-1(b)(4)
under the 1940 Act; arranging for bank or other borrowing for the Fund,
pursuant to the Adviser's determination of the timing, amount and terms of any
such borrowing; preparing the Fund's federal, state and local income tax
returns; preparing financial information for the Fund's proxy statements and
quarterly and annual reports to shareholders; preparing the Fund's periodic
financial reports to the Commission; and coordinating responses to shareholder
inquiries relating to the Fund.
Under the Administration Agreement, the Fund pays the Administrator a
monthly fee at the annual rate of 0.20% of the Fund's average net assets,
based on the average weekly net asset value.
The Administration Agreement was approved by the Fund's shareholders on
April 13, 1988. Continuance of the Administration Agreement was most recently
approved by the Fund's Board of Directors, including a majority of the
independent directors, on May 12, 1998. It may continue thereafter from year
to year if
39
<PAGE>
specifically approved at least annually by the Fund's Board of Directors or by
a vote of a majority of the Fund's outstanding voting securities. In either
event, the Administration Agreement must also be approved annually by vote of
a majority of the independent directors, cast in person at a meeting called
for that purpose.
Because the Adviser's and the Administrator's fees are based on the average
weekly net assets of the Fund, the Adviser and the Administrator will benefit
from any increase in the Fund's net assets resulting from the Offer. It is not
possible to state precisely the amount of additional compensation the Adviser
or the Administrator will receive as a result of the Offer because it is not
known how many Shares will be subscribed for and because the proceeds of the
Offer will be invested in additional portfolio securities which will fluctuate
in value. However, based on the estimated proceeds from the Offer assuming all
the Rights are exercised in full for the Estimated Subscription Price of $7.35
per Share, the Adviser would receive additional annual advisory fees of
approximately $133,000, and the Administrator would receive additional annual
administration fees of approximately $53,200, as a result of the increase in
average weekly net assets under management over the Fund's current assets
under management, assuming no fluctuations in the value of Fund portfolio
securities.
YEAR 2000 RISKS
Like other investment companies and financial and business organizations
around the world, the Fund will be adversely affected if the computer systems
used by the Adviser and the Fund's other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The inability to
properly process and calculate date-related information after January 1, 2000
could have a negative impact on handling securities trades, payment of
interest and dividends, pricing and account services. The Fund is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to the computer systems it uses and to obtain satisfactory assurances
that comparable steps are being taken by each of the Fund's major service
providers. The Fund does not expect to incur any significant costs in order to
address the Year 2000 Problem. However, at this time there can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the Fund.
NET ASSET VALUE
The net asset value of Shares is computed weekly on the last day of each
week on which the Exchange is open for trading. This determination is made as
of the close of the Exchange by deducting the amount of the liabilities of the
Fund from the value of its assets and dividing the difference by the number of
its Shares outstanding. Fixed-income securities (other than short-term
obligations, but including listed issues) may be valued by one or more
independent pricing services approved by the Board of Directors that utilize
both dealer-supplied valuations and electronic data processing techniques that
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive
reliance upon exchange or over-the-counter prices. Securities (other than
fixed-income securities) for which the principal market is one or more
securities exchanges will be valued at the last reported sale price prior to
the determination (or if there has been no current sale, at the closing bid
price) on the primary exchange on which such securities are traded. If a
securities exchange is not the principal market for a security such security
will be valued, if market quotations are readily available, at the closing bid
prices in the over-the-counter market. Portfolio securities for which there
are no such valuations, including restricted securities that are not liquid,
are valued at fair value as determined in good faith by or at the direction of
the Board of Directors. Short-term investments which mature in less than 60
days will be valued at amortized cost.
FEDERAL TAXATION
The following discussion is based on the advice of Kirkpatrick & Lockhart
LLP, Washington, D.C. See "Legal Matters."
40
<PAGE>
GENERAL
The Fund has elected to be, and qualifies for treatment as, a regulated
investment company ("RIC") under Subchapter M of the Code. To qualify, the
Fund must, among other things, (a) derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities or
foreign currencies, or other income (including gains from options or futures
contracts) derived from its business of investing in securities or those
currencies ("Income Requirement"); and (b) diversify its holdings so that, at
the end of each quarter of its taxable year, (i) at least 50% of the value of
its total assets is represented by cash, U.S. Government securities,
securities of other RICs and other securities, with such other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of its assets and that does not represent more than 10% of the
issuer's outstanding voting securities and (ii) not more than 25% of the value
of its total assets is invested in the securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
For each taxable year that the Fund qualifies as a RIC, it will not be
subject to federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gain and net realized gains from certain foreign currency transactions) and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) that it distributes to its shareholders, if it distributes at
least 90% of its investment company taxable income for that year
("Distribution Requirement"). The Fund intends to distribute substantially all
of its investment company taxable income each taxable year.
The Fund also currently intends to distribute all realized net capital gain
annually. If, however, the Board of Directors determines for any taxable year
to retain all or a portion of the Fund's net capital gain, that decision will
not affect the Fund's ability to qualify as a RIC but will subject the Fund to
a tax of 35% of the amount retained. In that event, the Fund expects to
designate the retained amount as undistributed capital gains in a notice to
its shareholders, who (i) will be required to include their proportionate
shares of the undistributed amount in their gross income as long-term capital
gains and (ii) will be entitled to credit their proportionate shares of the
35% tax paid by the Fund against their federal income tax liabilities. For
federal income tax purposes, the tax basis of Shares owned by a Fund
shareholder will be increased by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's gross income.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. The Fund intends to make sufficient distributions to avoid
application of the Excise Tax. For this and other purposes, a distribution
will be treated as paid by the Fund and received by the shareholders on
December 31 of a calendar year if it is declared by the Fund in that month of
that year, payable to shareholders of record on a date in that month and paid
by the Fund at any time through the end of the following January. Any such
distribution thus will be taxable to shareholders in the year the distribution
is declared, rather than the year in which the distribution is received.
DISTRIBUTIONS
Dividends from the Fund's investment company taxable income will be taxable
to its shareholders as ordinary income, whether paid in cash or reinvested in
Shares. Distributions of the Fund's net capital gain and undistributed capital
gains, if any, will be taxable to the shareholders as long-term capital gain,
regardless of how long they have held their Shares. Dividends are not expected
to be, and capital gain distributions will not be, eligible for the dividends-
received deduction allowed to corporations.
A participant in the Dividend Reinvestment Plan who receives a distribution
that is reinvested in Shares will be treated as having received a taxable
distribution and will have a basis for those Shares equal to their fair market
value on the distribution date. Shareholders will be notified annually as to
the federal income tax status
41
<PAGE>
of distributions to them. Investors should be careful to consider the tax
implications of buying Shares just prior to a distribution. The price of
Shares purchased at that time may reflect the amount of the forthcoming
distribution. Those purchasing just prior to the record date for a
distribution will receive the distribution, which nevertheless will be taxable
to them.
SALES OF SHARES
On a sale of Shares, a shareholder will realize taxable gain or loss
depending upon the amount realized on the sale and the shareholder's basis for
the Shares. That gain or loss will be treated as capital gain or loss if the
shareholder held the Shares as capital assets and will be long-term capital
gain or loss if the Shares were held for more than one year. Any such loss
will be disallowed to the extent the Shares that were disposed of are replaced
(such as pursuant to the Dividend Reinvestment Plan) within a period of 61
days beginning 30 days before and ending 30 days after the date of
disposition. In such a case, the basis of the acquired Shares will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on the sale
of Shares held for six months or less will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received by the shareholder on those Shares or any undistributed capital gains
designated with respect thereto.
ORIGINAL ISSUE DISCOUNT
The Fund may purchase debt securities (such as zero-coupon debt securities
and zero-fixed-coupon debt securities; see "Investment Policies and
Limitations--High Yield Debt Securities") that have original issue discount,
which generally is included in income ratably over the term of the security.
The discount that accrues each year on those securities thus will increase the
Fund's investment company taxable income, thereby increasing the amount that
must be distributed to satisfy the Distribution Requirement, without providing
the cash with which to make the distribution. Accordingly, the Fund may have
to dispose of other securities, thereby realizing gain or loss at a time when
it otherwise might not want to do so, to provide the cash necessary to make
distributions to shareholders.
ISSUES RELATING TO HEDGING INSTRUMENTS
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
federal income tax purposes the amount, character and timing of recognition of
the gains and losses the Fund realizes in connection therewith. Gain from the
disposition of foreign currencies (except certain gains that may be excluded
by future regulations), and gains from options and futures contracts derived
by the Fund with respect to its business of investing in securities or foreign
currencies, will be treated as qualifying income under the Income Requirement.
Regulated futures contracts and options that are subject to section 1256 of
the Code (collectively "Section 1256 contracts") and are held by the Fund at
the end of each taxable year will be required to be "marked-to-market" for
federal income tax purposes (that is, treated as having been sold at that time
at market value). Any unrealized gain or loss required to be recognized and
reported for tax purposes under this mark-to-market rule will be added to any
realized gains and losses recognized on Section 1256 contracts actually sold
by the Fund during the year, and the resulting gain or loss will be treated
(without regard to the holding period) as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. These rules may operate to increase
the amount that must be distributed by the Fund to satisfy the Distribution
Requirement, which amount will be taxable to the shareholders as ordinary
income, and to increase the net capital gain recognized to the Fund, without
in either case increasing the cash available to the Fund. The Fund may elect
to exclude certain transactions from the provisions of Section 1256, although
doing so may have the effect of increasing the relative proportion of net
short-term capital gain (taxable as ordinary income) and/or increasing the
amount of dividends that must be distributed to meet the Distribution
Requirement and avoid the imposition of the Excise Tax.
42
<PAGE>
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for federal income tax purposes. Because application of the
straddle rules may affect the character of gains or losses, defer the
recognition of losses and/or accelerate the recognition of gains from the
affected straddle positions and require the capitalization of interest expense
associated therewith, the amount that must be distributed to shareholders (and
the character of the distribution as ordinary income or long-term capital
gain) may be increased or decreased substantially as compared to a fund that
did not engage in such hedging transactions.
BACKUP WITHHOLDING
The Fund is required to withhold federal income tax at the rate of 31% on
all dividends, capital gain distributions and repurchase proceeds payable to
any individuals and certain other noncorporate shareholders who fail to
provide the Fund with their correct taxpayer identification number or (with
respect to dividends and capital gain distributions) who otherwise are subject
to backup withholding.
FOREIGN WITHHOLDING TAXES
Income received by the Fund from sources within foreign countries, and
gains realized on foreign securities, may be subject to withholding and other
taxes imposed by such countries, which would reduce the Fund's yield and/or
total return. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes, and many foreign countries do not impose
taxes on capital gains from investments by foreign investors. It is impossible
to determine the rate of foreign tax in advance, because the amount of the
Fund's assets to be invested in various countries is not known. If, as is
expected, the Fund does not have more than 50% of its assets invested in the
securities of foreign corporations at the close of its taxable year, it will
not be entitled to "pass through" to its shareholders the amount of foreign
taxes it paid.
FOREIGN SHAREHOLDERS
U.S. federal income taxation of a shareholder who, as to the United States,
is a non-resident alien individual, foreign trust or estate, foreign
corporation or foreign partnership depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by the
shareholder. Ordinarily, income from the Fund will not be treated as so
"effectively connected." In such case, dividends will be subject to U.S.
withholding tax of 30% (or lower treaty rate). Foreign shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in Shares, including the effect of any
applicable tax treaties.
OTHER TAXATION
The foregoing is only a summary of some of the important federal tax
considerations affecting the Fund and its shareholders. Distributions also may
be subject to state, local and foreign taxes, depending on each shareholder's
particular situation. Prospective shareholders thus are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in the Fund.
DESCRIPTION OF COMMON STOCK
GENERAL
The Fund has 100,000,000 authorized Shares, par value $0.01. Shares, as
issued, are fully paid and nonassessable. All Shares are equal as to
dividends, assets and voting privileges and have no pre-emptive, conversion or
redemption provisions. Shareholders are entitled to one vote per share and do
not have cumulative voting rights. The Shares are listed on the Exchange under
the symbol "HYP."
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<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund may not declare dividends or other distributions or purchase or
redeem any Shares if, at the time of the declaration, purchase or redemption,
as applicable (and after giving effect thereto), asset coverage with respect
to the loans made under the Credit Agreement, would be less than 300% (or such
higher percentage as may in the future be required by law) or asset coverage
with respect to any senior securities of a class which is stock would be less
than 200% (or such higher percentage as may in the future be required by law).
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the Fund (whether
voluntary or involuntary), the holders of the Shares will be entitled to
participate equally in the remaining assets of the Fund. Neither a sale, lease
or exchange of all or substantially all of the property and assets of the Fund
nor a consolidation or merger of the Fund with or into any other corporation
or business trust will be deemed to be a liquidation, dissolution or winding
up of the Fund.
VOTING
Holders of Shares have voting rights of one vote per Share. The Fund is
required by the rules of the Exchange to hold annual meetings of shareholders.
The most recent annual meeting of shareholders was held on August 27, 1998.
The next annual meeting of shareholders is expected to be scheduled for
August, 1999.
CERTAIN PROVISIONS OF THE ARTICLES
OF INCORPORATION AND BY-LAWS
Certain "antitakeover" provisions in its Articles of Incorporation and By-
Laws could limit the ability of others to acquire control of the Fund, to
cause it to engage in certain transactions or to modify its structure. These
provisions will make it more difficult to change management of the Fund than
if they had not been included in the Fund's Articles of Incorporation and By-
Laws, and could have the effect of depriving shareholders of an opportunity to
sell their Shares at a premium over prevailing market prices by discouraging
third parties from seeking to obtain control of the Fund in a tender offer or
similar transaction. However, they are designed to encourage persons seeking
control of the Fund to negotiate with its management regarding the price to be
paid and facilitating the continuity of the Fund's management, investment
objectives and policies.
The Board of Directors is divided into three classes, each having a term of
three years: each year the term of one class expires. Directors may be removed
from office only for cause and then only by the affirmative vote or consent of
the holders of at least 80% of the Shares. In addition, the affirmative vote
or consent of the holders of 66 2/3% or more of the Shares is required to
authorize the conversion of the Fund from a closed-end to an open-end
investment company, or generally to authorize any of the following
transactions with a person or entity that is directly or indirectly the
beneficial owner of 5% or more of the outstanding Shares; (i) merger or
consolidation of the Fund with or into any other corporation; (ii) issuance of
any securities of the Fund to any such person or entity for cash; (iii) sale,
lease or exchange of all or any substantial part of the assets of the Fund to
any such entity or person (except assets having an aggregate fair market value
of less than $1,000,000); or (iv) sale, lease or exchange to the Fund, in
exchange for securities of the Fund, of any assets of any such entity or
person (except assets having an aggregate fair market value of less than
$1,000,000).
Only a simple majority vote of shareholders is required to approve any of
the above transactions, except for conversion of the Fund to an open-end
investment company, if a majority of the Board of Directors, including a
majority of the disinterested directors, approves the transaction. A "super-
majority" vote of the holders of at least 80% of the Shares is required to
amend By-Law provisions concerning terms and removal of directors; a "super-
majority" vote of the holders of at least 66 2/3% of the Shares is required to
amend the Fund's Articles
44
<PAGE>
of Incorporation with regard to the rest of the foregoing provisions. The
"super-majority" voting provisions with respect to these transactions are more
stringent then are required by the 1940 Act or (except with respect to
mergers, consolidations or sales, leases or exchanges of all or any
substantial part of the assets of the Fund) the Maryland General Corporation
Law. The Board of Directors has considered all of these provisions of the
Fund's Articles of Incorporation and By-Laws and has determined that such
provisions are in the best interests of the Fund's shareholders.
DESCRIPTION OF CREDIT AGREEMENT
GENERAL
The Fund entered into a Credit Agreement dated as of October 31, 1993, and
subsequently amended from time to time, with BankBoston, pursuant to which
BankBoston has agreed to make loans to the Fund from time to time. The Fund
had $32,000,000 in loans outstanding under the Credit Agreement on September
30, 1998, at an average annual interest rate of 6.23%. The Fund's obligation
to BankBoston under the Credit Agreement is considered a senior security under
the 1940 Act, and the issuance of any subsequent senior securities will be
subject to compliance with the 1940 Act, including Section 18 thereof. Any
such subsequent senior securities may have certain terms, including, but not
limited to, those relating to interest rate, redemptions, repurchases and
maturity which differ from the terms of the Credit Agreement. The following
summary of certain terms of the Credit Agreement is qualified in its entirety
by reference to all provisions of the Credit Agreement, including the
definitions therein of certain terms. A copy of the Credit Agreement is filed
as an exhibit to the Fund's Registration Statement on Form N-2, of which this
Prospectus forms a part. The Fund may seek to increase the amount it may
borrow under the Credit Agreement or other credit facilities following
completion of the rights offering to the maximum amount then permissible under
the 1940 Act but no formal decision has been made and there can be no
assurance as to the timing or utilization of such additional facilities.
INTEREST
The outstanding principal amount of each loan under the Credit Agreement
bears interest until maturity at (i) the greater of (a) the annual rate of
interest announced from time to time by BankBoston as its "Base Rate" and (b)
the Federal Fund Effective Rate (as defined in the Credit Agreement plus 1/2
of 1% annually, or (ii) the Adjusted Eurodollar Rate (as defined in the Credit
Agreement) plus 0.50% annually, or (iii) the applicable Money Market Rate (as
defined in the Credit Agreement), as selected by the Fund.
COMMITMENT FEE
In exchange for BankBoston's commitment to make loans to the Fund from time
to time, the Fund pays to BankBoston a Commitment Fee of 0.09% per annum of
the unused portion of the $35 million available under the Credit Agreement.
PREPAYMENTS
Certain of the loans made from time to time under the Credit Agreement may
be repaid by the Fund prior to maturity upon the payment of all of the unpaid
interest accrued to such date on the amount of the principal of the loan being
prepaid. Loans under the Credit Agreement may also be declared immediately due
and payable by BankBoston or, in certain circumstances, may become immediately
due and payable without such declaration. All prepayments of loans made under
the Credit Agreement (except a prepayment in full) will be made in an amount
of $100,000 or an integral multiple thereof.
45
<PAGE>
RESTRICTIVE COVENANTS
Under the 1940 Act and the Credit Agreement, the Fund may not declare
dividends or other distributions on the Shares or purchase any Shares if, at
the time of the declaration or purchase, as applicable (and after giving
effect thereto), asset coverage with respect to the loans made under the
Credit Agreement, would be less than 300% (or such higher percentage as may in
the future be required by law). Under the Code, the Fund must, among other
things, distribute at least 90% of its investment company taxable income each
year to maintain its qualification for tax treatment as a RIC. The foregoing
limitations on dividends, other distributions and purchases may under certain
circumstances impair the Fund's ability to maintain such qualification. See
"Federal Taxation."
The asset coverage of a class of senior securities representing
indebtedness, such as loans under the Credit Agreement, is defined as the
ratio of (i) the total assets of the Fund, less all liabilities and
indebtedness not represented by senior securities, to (ii) the aggregate
amount of senior securities representing indebtedness of the Fund.
The Credit Agreement contains a covenant limiting the Fund's ability to
create or permit to exist any lien or encumbrance upon any of its property or
assets in favor of any person or entity other than BankBoston, other than such
liens as are necessary in connection with the Fund's directors' and officers'
errors and omission liability insurance policy or liens in connection with
authorized futures transactions and collateral arrangements with respect to
options and futures contracts or other authorized investments.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held by State Street Bank and Trust
Company, whose principal business address is One Heritage Drive, North Quincy,
Massachusetts 02171, as custodian under a custodian contract.
State Street Bank and Trust Company serves as dividend disbursing agent, as
agent under the Plan and as transfer agent and registrar for the Shares.
LEGAL OPINIONS
The validity of the Shares offered hereby has been passed on for the Fund
by Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036. Certain matters have been passed on for the Dealer-Manager by
Rogers & Wells LLP, 200 Park Avenue, New York, New York 10166-0153.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The financial statements, insofar as they relate to the fiscal years ended
March 31, 1998 and 1997, included in this Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting. The
address of PricewaterhouseCoopers LLP is 1177 Avenue of the Americas, New
York, New York 10036. The financial statements, insofar as they relate to the
remaining periods (other than the period ended September 30, 1998), included
in this Prospectus have been so included in reliance on the report of Deloitte
& Touche LLP, the Fund's previous independent accountants.
46
<PAGE>
FURTHER INFORMATION
The Fund has filed with the Commission, Washington, D.C., 20549, a
Registration Statement under the Securities Act with respect to the Shares
offered hereby. Further information concerning these securities and the Fund
may be found in the Registration Statement, of which this Prospectus
constitutes a part, on file with the Commission. The Registration Statement
may be inspected without charge at the Commission's office in Washington,
D.C., and copies of all or any part thereof may be obtained from such office
after payment of the fees prescribed by the Commission.
The Fund is subject to the informational requirements of the 1934 Act and
the 1940 Act, and in accordance therewith files reports and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, Washington, D.C. 20549 and
the Commission's regional offices, including offices at Seven World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports and other information
concerning the Fund may also be inspected at the offices of the Exchange. The
Commission maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference into this Prospectus, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, reports, proxy and
information statements and other information concerning the Fund can be
inspected at the offices of the Exchange, 20 Broad Street, New York, New York
10005.
47
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS--134.6%
CORPORATE BONDS--123.4%
- -------------------------------------------------------------------------------
AEROSPACE/DEFENSE--3.8%
Argo-Tech Corp., Sr. Sub.
Notes......................... B3 8.625% 10/01/07 $ 500 $ 472,500
K&F Industries, Inc., Sr. Sub.
Notes, Ser. B................. B3 9.25 10/15/07 500 490,000
L-3 Communications Corp., Sr.
Sub. Notes.................... B2 8.50 5/15/08 750 761,250
Moog. Inc., Sr. Sub. Notes,
Ser. B........................ B1 10.00 5/01/06 1,340 1,366,800
----------
3,090,550
- -------------------------------------------------------------------------------
AUTOMOTIVE--4.6%
Accuride Corp., Sr. Sub.
Notes......................... B2 9.25 2/01/08 750 720,000
Federal-Mogul Corp.,
Sr. Notes.................... Ba2 8.80 4/15/07 500 546,955
Sr. Notes.................... Ba2 7.875 7/01/10 500 512,390
Johnstown America Industries,
Inc., Sr. Sub. Notes.......... B3 11.75 8/15/05 1,500 1,545,000
Key Plastics, Inc., Sr. Sub.
Notes, Ser. B................. B3 10.25 3/15/07 500 482,500
----------
3,806,845
- -------------------------------------------------------------------------------
BASIC INDUSTRIES-
MANUFACTURING--3.6%
Gaylord Container Corp., Sr.
Notes......................... B3 9.375 6/15/07 1,000 810,000
International Wire Group, Inc.,
Sr. Sub. Notes................ B3 11.75 6/01/05 500 512,500
Neenah Corp., Sr. Sub. Notes,
Ser. B........................ B3 11.125 5/01/07 750 759,375
UNICCO Service Co./UNICCO Fin.
Corp.
Sr. Sub. Notes, Ser. B....... B3 9.875 10/15/07 1,000 920,000
----------
3,001,875
- -------------------------------------------------------------------------------
BUILDING & RELATED INDUSTRIES--
3.1%
Associated Materials, Inc., Sr.
Sub. Notes.................... B2 9.25 3/01/08 500 475,000
Falcon Building Prod., Inc.,
Sr. Sub. Disc. Notes
Zero Coupon (until
6/15/02).................. B3 10.50 6/15/07 350 192,500
Sr. Sub. Notes............... B3 9.50 6/15/07 1,000 840,000
Nortek, Inc.,
Sr. Notes.................... B1 8.875 8/01/08 750 725,625
Sr. Notes, Ser. B............ B1 9.25 3/15/07 350 351,750
----------
2,584,875
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-1
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CABLE--5.9%
Adelphia Communications Corp.,
Sr. Notes.................... B2 8.375% 2/01/08 $ 365 $ 370,475
Sr. Notes, Ser. B............ B2 9.875 3/01/07 500 540,000
Century Communications Corp.,
Sr. Disc. Notes............... Ba3 Zero 3/15/03 225 157,500
Classic Cable Inc.............. B3 9.875 8/01/08 280 284,900
Classic Communications Inc.,
Sr. Disc. Notes
Zero Coupon (until 8/1/03)... NR 13.25 8/01/09 890 498,400
Falcon Holding Group L.P.,
Sr. Deb., Ser. B............. B2 8.375 4/15/10 350 353,500
Sr. Disc. Deb., Ser. B
Zero Coupon (until
4/15/03).................. B2 9.285 4/15/10 500 337,500
Frontiervision Holdings L.P.,
Sr. Disc. Notes,
Zero Coupon (until 2/15/02).. B## 11.875 9/15/07 1,000 817,500
Multicanal S.A.,
Sr. Notes.................... Ba3 10.50 2/01/07 500 340,000
Sr. Notes.................... NR 10.50 4/15/18 230 142,600
Rifkin Acquisition Partners
L.L.L.P., Sr. Sub. Notes...... B3 11.125 1/15/06 500 540,000
Rogers Communications Inc., Sr.
Notes......................... B2 8.875 7/15/07 440 433,400
----------
4,815,775
- -------------------------------------------------------------------------------
CHEMICALS--3.8%
PCI Chemicals Canada Inc., Sr.
Sec. Notes, Ser. B (Canada)... B2 9.25 10/15/07 500+ 400,000
Phillipp Brothers Chemicals
Inc., Sr. Sub. Notes.......... B3 9.875 6/01/08 680 646,000
Pioneer Americas Acquisition
Corp., Sr. Sec. Notes, Ser.
B............................. B2 9.25 6/15/07 500 412,500
Sovereign Specialty Chemicals,
Sr. Sub. Notes, Ser. B........ B3 9.50 8/01/07 1,000 965,000
Texas Petrochemicals Corp., Sr.
Sub. Notes.................... B3 11.125 7/01/06 750 690,000
----------
3,113,500
- -------------------------------------------------------------------------------
CONSUMER GOODS & SERVICES--2.3%
Chattem Inc., Sr. Sub. Notes... B2 8.875 4/01/08 500 485,000
Muzak L.P., Muzak Capital, Sr.
Notes......................... Ba3 10.00 10/01/03 500 505,000
Pierce Leahy Corp., Sr. Sub.
Notes......................... B3 9.125 7/15/07 500 510,000
Revlon Worldwide, Sr. Disc.
Notes, Ser. B................. Ba2 Zero 3/15/01 500 383,750
----------
1,883,750
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONTAINERS--3.0%
BWay Corp., Sr. Sub. Notes,
Ser. B........................ B2 10.25% 4/15/07 $ 750 $ 787,500
Silgan Holdings, Inc.,
Sr. Sub. Deb................. B1 9.00 6/01/09 1,500 1,485,000
Sub. Deb., PIK............... NR 13.25 7/15/06 200 220,282
----------
2,492,782
- -------------------------------------------------------------------------------
ENERGY & RELATED GOODS & SERVICES--
10.0%
Abraxas Petroleum Corp., Sr.
Notes,
Ser. B........................ B2 11.50 11/01/04 1,500 1,215,000
Costilla Energy Inc., Sr.
Notes......................... B2 10.25 10/01/06 500 435,000
Cross Timbers Oil Co., Sr. Sub.
Notes,
Ser. B........................ B2 9.25 4/01/07 750 690,000
Dailey International, Inc., Sr.
Notes......................... B2 9.50 2/15/08 500 300,000
Energy Corp. Amererica, Sr.
Sub. Notes, Ser. A............ B2 9.50 5/15/07 750 693,750
Frontier Oil Corp., Sr. Notes.. NR 9.125 2/15/06 750 697,500
Kelley Oil and Gas Corp., Sr.
Sub. Notes, Ser. B............ B3 10.375 10/15/06 355 301,750
P&L Coal Holdings Corp., Sr.
Notes......................... Ba3 8.875 5/15/08 500 508,750
Petroleos Mexicanos, Gtd. Sr.
Notes (Mexico)................ Ba2 8.85 9/15/07 500+ 400,000
Plains Resources, Inc., Sr.
Sub. Notes.................... B2 10.25 3/15/06 1,180 1,191,800
RAM Energy, Inc., Sr. Notes.... B3 11.50 2/15/08 1,750 1,452,500
Tatneft Finance, Gtd. Bonds
(Russia)...................... B2 9.00 10/29/02 1,000+ 100,000
Transportadora de Gas del Sur,
S.A., Notes (Argentina)....... Ba3 10.25 4/25/01 250+ 237,500
----------
8,223,550
- -------------------------------------------------------------------------------
ENTERTAINMENT--0.9%
Loews Cineplex Entertainment
Corp., Sr. Sub. Notes......... B3 8.875 8/01/08 750 740,625
- -------------------------------------------------------------------------------
FINANCIAL SERVICES--9.4%
Bangkok Bank Public Co., Deb.
(Thailand).................... NR 7.25 9/15/05 1,000+ 480,000
Emergent Group Inc., Sr. Notes,
Ser. B........................ B3 10.75 9/15/04 895 411,700
First Nationwide Holdings,
Inc., Sr. Notes............... Ba3 12.50 4/15/03 750 840,000
FirstFed Financial Corp.,
Notes......................... B2 11.75 10/01/04 500 515,000
Guangdong Enterprises Hldgs.,
Ltd., (China)
Sr. Notes.................... Baa3 8.875 5/22/07 250+ 112,500
Sr. Notes.................... Baa3 8.875 5/22/07 900+ 405,000
Hawthorne Financial Corp., Sr.
Notes......................... NR 12.50 12/31/04 1,250 1,250,000
Olympic Financial, Ltd., Sr.
Notes......................... NR 11.50 3/15/07 1,500@ 1,083,000
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES (CONT'D.)
Resource America, Inc., Sr.
Notes......................... B- 12.00% 8/01/04 $ 965 $ 800,950
Thai Farmers Bank Ltd., Sub.
Notes (Thailand).............. NR 8.25 8/21/16 1,500+ 675,000
Western Financial Svgs. Bank,
F.S.B., Sub. Cap. Deb......... B1 8.875 8/01/07 1,500 1,200,000
----------
7,773,150
- ------------------------------------------------------------------------------
FOOD & LODGING--4.0%
Aurora Foods Inc.,
Sr. Sub. Notes, Ser. D....... B1 9.875 2/15/07 230 246,100
Sr. Sub. Notes, Ser. D....... B1 8.75 7/01/08 245 252,350
Del Monte Foods Co., Sr. Disc.
Notes, Zero Coupon (until
12/15/02)..................... B- 12.50 12/15/07 2,500 1,425,000
John Q. Hammons Hotels, First
Mtge. Bonds................... B1 8.875 2/15/04 1,500 1,357,500
----------
3,280,950
- ------------------------------------------------------------------------------
GAMING--2.1%
Fitzgeralds Gaming Corp., Sr.
Sec. Notes.................... B3 12.25 12/15/04 500 350,000
Hollywood Casino Corp., Sr.
Sec. Notes.................... B2 12.75 11/01/03 350 362,250
Lady Luck Gaming Corp., First
Mtge. Notes................... B2 11.875 3/01/01 1,000 1,012,500
----------
1,724,750
- ------------------------------------------------------------------------------
GENERAL INDUSTRIAL--2.1%
Cathay International Ltd., Sr.
Notes......................... Ba3 13.00 4/15/08 750 450,000
Wesco Distribution, Inc., Sr.
Sub. Notes.................... B2 9.125 6/01/08 1,350 1,299,375
----------
1,749,375
- ------------------------------------------------------------------------------
GROCERY STORES--1.7%
Disco S.A., Notes.............. NR 9.875 5/15/08 750 465,000
Homeland Stores, Inc., Sr.
Notes......................... NR 10.00 8/01/03 500 447,500
Pathmark Stores, Inc., Sub.
Notes......................... Caa 11.625 6/15/02 500 473,750
----------
1,386,250
- ------------------------------------------------------------------------------
HEALTH CARE--4.8%
Beverly Enterprises, Inc., Sr.
Notes......................... Ba3 9.00 2/15/06 70 70,175
Columbia/HCA Healthcare Corp.,
Notes......................... Ba2 7.25 5/20/08 1,000 969,630
Mediq, Inc., Sr. Sub. Notes.... B3 11.00 6/01/08 930 874,200
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE (CONT'D.)
Universal Hospital Svcs.,
Sr. Sub. Notes............... B3 10.25% 3/01/08 $1,750 $1,575,000
Sr. Sub. Notes............... B2 8.375 4/01/08 500 450,000
----------
3,939,005
- -------------------------------------------------------------------------------
HOME BUILDER & REAL ESTATE--
5.1%
Beazer Homes USA, Inc., Sr.
Notes......................... B1 8.875 4/01/08 750 697,500
Kaufman & Broad Home Corp., Sr.
Sub. Notes.................... Ba3 9.625 11/15/06 750 776,250
Presley Companies, Sr. Notes... Caa 12.50 7/01/01 1,000 850,000
Ryland Group, Inc., Sr. Sub.
Notes......................... B+ 8.25 4/01/08 750 676,875
Standard Pacific Corp., Sr.
Notes......................... Ba2 8.50 6/15/07 750 727,500
U.S. Home Corp., Sr. Sub.
Notes......................... B1 8.88 8/15/07 500 495,000
----------
4,223,125
- -------------------------------------------------------------------------------
INDUSTRIALS--2.3%
Clark Refining & Marketing,
Inc., Sr. Notes............... Ba3 8.625 8/15/08 915 841,800
Westpoint Stevens, Inc., Sr.
Notes......................... BB ## 7.875 6/15/08 1,000 1,017,500
----------
1,859,300
- -------------------------------------------------------------------------------
MEDIA & COMMUNICATIONS--8.5%
Echostar DBS Corp., Sr. Sec.
Notes......................... B-## 12.50 7/01/02 750 791,250
Fox/Liberty Networks L.L.C.,
Sr. Disc. Notes, Zero Coupon
(until 8/15/02)............. B1 9.75 8/15/07 1,500 982,500
Sr. Notes.................... B1 8.875 8/15/07 15 14,700
Globo Comunicacoes e
Participacoes S.A., Notes,
(Brazil)...................... NR 10.50 12/20/06 1,750+ 875,000
Granite Broadcasting Corp., Sr.
Sub. Notes.................... B3 8.875 5/15/08 340 317,900
Innova S de R.L., Sr. Notes
(Mexico)...................... B2 12.875 4/01/07 1,500+ 825,000
Jacor Communications, Inc., Sr.
Sub. Notes.................... B2 9.75 12/15/06 250 270,625
Primedia, Inc., Sr. Notes...... Ba3 7.625 4/01/08 405 388,800
Sullivan Graphics, Inc., Sr.
Sub. Notes.................... Caa 12.75 8/01/05 1,000 1,015,000
Sun Media Corp., Sr. Sub.
Notes......................... B2 9.50 5/15/07 500 512,500
Tevecap S.A., Sr. Notes
(Brazil)...................... B2 12.625 11/26/04 800+ 336,000
TV Azteca S.A. de CV, Gtd., Sr.
Notes (Brazil)................ Ba3 10.50 2/15/07 1,000+ 680,000
----------
7,009,275
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
METALS--5.9%
Ameristeel Corp., Sr. Notes.... Ba3 8.75% 4/15/08 $ 285 $ 265,050
Bayou Steel Corp., First Mtge.
Notes......................... B1 9.50 5/15/08 1,000 862,500
Companhia Vale do Rio Doce,
Notes (Brazil)................ NR 10.00 4/02/04 750+ 585,000
CSN Iron S.A., Gtd. Notes
(Brazil)...................... B2 9.125 6/01/07 1,250+ 706,250
Iron Medium Term Note Inc.,
Delaware, Sr. Sub. Notes...... B3 8.75 9/30/09 350 346,500
Pohang Iron & Steel Co. Ltd.,
Sr. Notes.................... Ba1 7.125 7/15/04 1,000 756,690
Sr. Notes.................... Bal 7.375 5/15/05 500 371,520
Weirton Steel Corp., Sr.
Notes......................... B2 11.375 7/01/04 $1,000 930,000
----------
4,823,510
- -------------------------------------------------------------------------------
PAPER & PACKAGING--10.4%
American Pad & Paper Company,
Delaware, Sr. Sub. Notes, Ser.
B............................. CCC+## 13.00 11/15/05 1,385 761,750
APP Int'l. Finance Co.,
Sec. Notes (Indonesia)...... B2 3.50 4/30/03 870+ 330,600
Sec. Notes (Indonesia)....... B2 11.75 10/01/05 750+ 465,000
Aracruz Celulose S.A. (Brazil),
Notes........................ B2 10.375 1/31/02 1,035+ 859,050
Notes........................ B2 10.375 1/31/02 715+ 593,450
Sr. Sub. Notes............... B2 10.25 10/01/06 375+ 326,250
Bahia Sul Celulose S.A. (Bra-
zil).......................... NR 10.625 7/10/04 500+ 325,000
Buckeye Technologies, Inc., Sr.
Sub. Notes.................... Ba3 8.00 10/15/10 465 444,075
Container Corp. of America,
Sr. Notes.................... B1 9.75 4/01/03 1,000 1,010,000
Sr. Notes, Ser. B............ B2 10.75 5/01/02 1,000 1,025,000
Doman Industries Ltd., Sr.
Notes (Canada)................ B1 8.75 3/15/04 750+ 525,000
Klabin Fabricadora de Papel e
Celulose S.A., Gtd. Notes
(Brazil)...................... NR 11.00 8/12/04 1,000+ 820,000
Pindo Deli Finance Mauritius
Ltd., Gtd. Sr. Notes
(Indonesia)................... NR 10.75 10/01/07 1,750+ 735,000
Repap New Brunswick, Inc., Sr.
Sec. Notes (Canada)........... Caa 10.625 4/15/05 500+ 300,000
----------
8,520,175
- -------------------------------------------------------------------------------
TECHNOLOGY--5.6%
Advanced Micro Devices, Inc.,
Sr. Sec. Notes................ Ba3 11.00 8/01/03 500 505,000
Concentric Network Corp., Sr.
Notes......................... NR 12.75 12/15/07 255@ 235,875
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TECHNOLOGY (CONT'D.)
DecisionOne Holdings Corp.,
Sr. Disc. Deb., Zero Coupon
(until 8/1/02)............. NR 11.50% 8/01/08 $1,000@ $ 375,000
Sr. Sub. Notes,............. B3 9.75 8/01/07 500 325,000
Fisher Scientific
International, Inc., Sr. Sub.
Notes........................ B3 9.00 2/01/08 750 720,000
Samsung Electronics America,
Inc., Gtd. Notes............. Ba1 9.75 5/01/03 1,750 1,277,500
Telecommunications Tech
Company L.L.C., Sr. Sub.
Note......................... B3 9.75 5/15/08 795 715,500
Verio Inc., Sr. Notes......... B3 10.375 4/01/05 500 490,000
----------
4,643,875
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS--19.0%
Advanced Radio Telecom Corp.,
Sr. Notes.................... Caa## 14.00 2/15/07 325 286,000
American Mobile Satellite,
Inc., Sr. Notes.............. NR 12.25 4/01/08 750@ 431,250
BTI Telecom Corp., Sr. Notes.. B3 10.50 9/15/07 1,750 1,470,000
Century Communications Corp.,
Sr. Disc. Notes.............. Ba3 11.25 1/15/08 1,750 831,250
Clearnet Communications, Inc.,
Sr. Disc. Notes,
Zero Coupon (until 12/15/00)
(Canada)................... B3 14.75 12/15/05 750+ 630,000
E Spire Communications
Insurance, Sr. Disc.
Notes Zero Coupon (until
4/1/01).................... NR 12.75 4/01/06 500 375,000
GST Network Funding, Inc., Sr.
Disc. Notes,
Zero Coupon (until 5/1/03).. NR 13.25 5/01/08 1,765 838,375
GST Telecommunications, Inc.,
Sr. Sub. Notes,
Zero Coupon (until
11/15/02).................. NR 12.75 11/15/07 500 475,000
Hyperion Telecommunications,
Inc.,
Sr. Disc. Notes, Zero Coupon
(until 4/15/01)............ B3 13.00 4/15/03 265 184,175
Sr. Sec. Notes, Ser. B...... B3 12.25 9/01/04 715 700,700
ICO Global Commerce, Sr.
Notes........................ CCC+## 15.00 8/01/05 410 319,800
Intermedia Communications,
Inc.,
Sr. Notes................... B2 8.60 6/01/08 1,000 990,000
Sr. Notes, Ser. B........... B2 8.875 11/01/07 350 351,750
Iridium LLC/Cap. Corp.,
Gtd. Sr. Notes, Ser. D...... B3 10.875 7/15/05 300 238,500
Sr. Notes................... NR 11.25 7/15/05 1,000 805,000
ITC Deltacom, Inc., Sr.
Notes........................ B2 8.875 3/01/08 350 353,500
IXC Communications, Inc., Sr.
Sub. Notes................... B3 9.00 4/15/08 750 745,312
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST MATURITY AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
Korea Telecom,
Notes..................... Ba1 7.50% 6/01/06 $ 500+ $ 342,895
Notes..................... Ba1 7.625 4/15/07 1,000+ 691,990
McLeod USA Inc., Sr. Notes.. B2 9.25 7/15/07 250 256,250
MGC Communications Inc., Sr.
Sec. Notes, Ser. B......... Caa 13.00 10/01/04 500 385,000
MobileMedia Communications,
Inc., Sr. Sub. Notes....... C 9.375 11/01/07 1,000** 170,000
Philippine Long Dist. Tel.
Co., Notes (The
Philippines)............... Ba2 7.85 3/06/07 750+ 559,238
PsiNet Inc., Sr. Notes...... B3 10.00 2/15/05 500 502,500
SK Telecom Ltd., Notes...... Ba1 7.75 4/29/04 1,000 755,180
Time Warner Telecom L.L.C.,
Sr. Notes.................. B2 9.75 7/15/08 500 505,000
Winstar Communications, Inc.
Sr. Disc. Notes, Zero
Coupon (until 10/15/00).. NR 14.00 10/15/05 1,750 1,137,500
Sr. Sub. Notes............ NR 11.00 3/15/08 500 350,000
------------
15,681,165
- -------------------------------------------------------------------------------
TRANSPORTATION--1.5%
MRS Logisticasa S.A., Notes
(Brazil)................... NR 10.625 8/15/05 500+ 240,000
Valujet, Inc., Sr. Notes.... B3 10.25 4/15/01 1,250 1,000,000
------------
1,240,000
------------
Total corporate bonds (cost
$119,483,711).............. 101,608,032
- -------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS+--5.4%
Republic of Argentina,
Bonds...................... Ba3 11.00 10/09/06 1,750 1,662,500
Republic of Brazil, Bonds,
Ser. C..................... B1 4.50 4/15/14 1,471 923,132
Republic of Korea, Bonds.... BB+## 8.875 4/15/08 1,500 1,312,170
Republic of Venezuela,
Bonds...................... NR 9.25 9/15/27 500 261,500
Republic of Venezuela,
Global Bonds............... B2 9.25 9/15/27 500 287,500
------------
Total foreign government
obligations
(cost $5,275,155).......... 4,446,802
- -------------------------------------------------------------------------------
<CAPTION>
SHARES
---------
<S> <C> <C> <C> <C> <C>
COMMON STOCKS*--0.3%
Fitzgeralds Gaming Corp..... -- -- -- 10,000 220,000
Sinking Fund Holding Group.. -- -- -- 4,070 8,140
------------
Total common stocks (cost
$320,000).................. 228,140
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S INTEREST MATURITY VALUE
DESCRIPTION RATING RATE DATE SHARES (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREFERRED STOCKS--5.4%
Concentric Network Corp..... NR 13.75% -- 690 $ 603,750
Fairfield Mfg., Inc.,
Exchangeable, PIK.......... NR 11.25 -- 1,000 960,000
Granite Broadcasting Corp.,
Cumulative Exchangeable,
PIK........................ NR 12.75 -- 372 376,036
IXC Communications, Inc.,
Jr. Pfd. Exchangeable
Ser........................ CCC+## 12.50 -- 10,002 346,183
Lady Luck Gaming Corp., Ser.
A.......................... NR 11.50 -- 7,000 238,000
Sinking Fund Holdings Group,
Inc., Exchangeable PIK..... NR 13.75% -- 110 792,000
Superior Nat'l. Cap. Tr..... NR 12.25 -- 1,135 1,112,300
-----------
Total preferred stocks (cost
$4,882,179)................ 4,428,269
- -------------------------------------------------------------------------------
<CAPTION>
EXPIRATION
DATE WARRANTS
---------- --------
<S> <C> <C> <C> <C> <C>
WARRANTS*--0.1%
American Mobile Satellite
Corp....................... NR -- 4/1/08 280 1,319
Benedek Communications
Corp....................... NR -- 7/1/07 5,500 11,000
Concentric Network Corp..... NR -- 1/1/09 255 22,950
MGC Communications, Inc..... NR -- 10/1/20 500 24,000
-----------
Total warrants (cost
$17,500)................... 59,269
-----------
Total long-term investments
(cost $129,978,545)........ 110,770,512
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-9
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1998
(UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S INTEREST EXPIRATION AMOUNT VALUE
DESCRIPTION RATING RATE DATE (000) (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENT--1.1%
REPURCHASE AGREEMENT--
1.1%......................
Paribas Corp., dated
9/30/98, due in the amount
of $904,139 (cost
$904,000; collateralized
by $821,000 U.S. Treasury
Notes 6.50%, 8/15/05,
approximate value
including accrued interest
$930,296)................. NR 5.54 10/01/98 $904 $ 904,000
TOTAL INVESTMENTS--135.7%
(cost $130,882,545;
Note 3)................... 111,674,512
Other assets in excess of
liabilities--(35.7)%...... (29,363,304)
------------
Net Assets--100%........... $ 82,311,208
============
</TABLE>
- ----------------
*--Non-income-producing security.
**--Represents issuer in default on interest payments; non-income-
producing security.
##--S&P Equivalent to Moody's Rating.
+--US$ Denominated Foreign Bonds.
@--Consists of more than 1 class of securities traded together as a unit;
generally bonds with attached stock or warrants.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in Kind.
L.L.C.--Limited Liability Corporation.
L.L.L.P.--Limited Liability Limited Partnership.
L.P.--Limited Partnership.
See Notes to Financial Statements.
F-10
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Investments, at value (cost $130,882,545)........................ $111,674,512
Cash............................................................. 853
Interest and dividends receivable................................ 3,330,341
Receivable for investments sold.................................. 1,541,089
Other assets..................................................... 45,250
------------
Total assets................................................. 116,592,045
------------
LIABILITIES
Loan payable (Note 4)............................................ 32,000,000
Payable for investments purchased................................ 987,090
Dividends payable................................................ 825,190
Loan interest payable (Note 4)................................... 285,652
Accrued expenses................................................. 120,989
Advisory fee payable............................................. 33,670
Deferred directors' fees......................................... 14,658
Administration fee payable....................................... 13,588
------------
Total liabilities............................................ 34,280,837
------------
NET ASSETS....................................................... $ 82,311,208
============
Net assets were comprised of:
Common stock, at par........................................... $ 113,674
Paid-in capital in excess of par............................... 104,313,386
------------
104,427,060
Undistributed net investment income............................ 647,061
Accumulated net realized loss on investments................... (3,554,880)
Net unrealized depreciation of investments..................... (19,208,033)
------------
Net assets, September 30, 1998................................. $ 82,311,208
============
Net asset value per share ($82,311,208 / 11,367,373 shares of
common stock issued and outstanding)............................ $7.24
=====
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE>
THE HIGH YIELD PLUS FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
NET INVESTMENT INCOME
Income
Interest....................................................... $ 6,516,843
Dividends...................................................... 125,448
------------
6,642,291
------------
Expenses
Investment advisory fee........................................ 247,864
Administration fee............................................. 99,146
Custodian's fees and expenses.................................. 57,000
Legal fees and expenses........................................ 35,000
Reports to shareholders........................................ 22,000
Transfer agent's fees and expenses............................. 19,000
Insurance expense.............................................. 15,000
Audit fee and expenses......................................... 13,500
Listing fee.................................................... 10,000
Directors' fees and expenses................................... 9,000
Miscellaneous.................................................. 938
------------
Total operating expenses..................................... 528,448
Loan interest expense
(Note 4)...................................................... 980,065
------------
Total expenses............................................... 1,508,513
------------
Net investment income............................................ 5,133,779
------------
Realized and Unrealized
Loss on Investments
Net realized loss on investment transactions..................... (411,673)
Net change in unrealized depreciation of investments............. (22,328,229)
------------
Net loss on investments.......................................... (22,739,902)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $(17,606,123)
============
</TABLE>
THE HIGH YIELD PLUS FUND, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
INCREASE (DECREASE) IN CASH
Cash flows provided from operating activities Interest and
dividends received (excluding discount amortization of
$670,630)....................................................... $ 5,551,837
Operating expenses paid........................................ (1,442,643)
Loan interest and commitment fee paid.......................... (1,020,045)
Maturities of short-term portfolio investments, net............ (904,000)
Purchases of long-term portfolio investments................... (73,079,560)
Proceeds from disposition of long-term portfolio investments... 70,972,193
Deferred expenses and other assets............................. (9,520)
------------
Net cash provided from operating activities.................... 68,262
------------
Cash used for financing activities
Net increase in notes payable.................................. 2,000,000
Cash dividends paid (excluding reinvestment of dividends of
$156,275)..................................................... (4,767,348)
------------
Net cash used for financing activities......................... (2,767,348)
------------
Net decrease in cash........................................... (2,699,086)
Cash at beginning of period.................................... 2,699,939
------------
Cash at end of period.......................................... $ 853
============
RECONCILIATION OF NET DECREASE IN NET ASSETS TO NET CASH PROVIDED
FROM OPERATING ACTIVITIES
Net decrease in net assets resulting from operations............. $(17,606,122)
------------
Increase in investments.......................................... (3,283,294)
Net realized loss on investment transactions..................... 411,673
Net change in unrealized depreciation of investments............. 22,328,228
Decrease in receivable for investments sold...................... 3,903,685
Increase in interest and dividends receivable.................... (419,824)
Decrease in deferred expenses and other assets................... 9,520
Decrease in payable for investments purchased.................... (5,497,749)
Increase in accrued expenses and other liabilities............... 222,145
------------
Total adjustments............................................ 17,674,384
------------
Net cash provided from operating activities.................. $ 68,262
============
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998
------------------ --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................... $ 5,133,779 $ 9,479,163
Net realized gain (loss) on investment
transactions............................. (411,673) 5,009,438
Net change in unrealized
appreciation/depreciation of
investments.............................. (22,328,228) 2,649,914
------------ ------------
Net increase (decrease) in net assets
resulting from operations................ (17,606,122) 17,138,515
Dividends from net investment income........ (4,797,317) (9,479,163)
Distributions in excess of net investment
income..................................... -- (19,779)
Value of Fund shares issued to shareholders
in reinvestment of dividends............... 156,275 876,479
------------ ------------
Total increase (decrease)................... (22,247,164) 8,516,052
NET ASSETS
Beginning of period......................... 104,558,372 96,042,320
------------ ------------
End of period(a)............................ $ 82,311,208 $104,558,372
============ ============
- ---------------------------
(a) Includes undistributed net investment
income of.................................. $ 647,061 $ 310,599
------------ ------------
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
The High Yield Plus Fund, Inc. (the "Fund") was organized in Maryland on
February 3, 1988, as a diversified, closed-end management investment company.
The Fund had no transactions until April 4, 1988, when it sold 11,000 shares
of common stock for $102,300 to Wellington Management Company, LLP (the
"Investment Adviser"). Investment operations commenced on April 22, 1988. The
Fund's primary objective is to provide a high level of current income to
shareholders. The Fund seeks to achieve this objective through investment in
publicly or privately offered high yield debt securities rated in the medium
to lower categories by recognized rating services or nonrated securities of
comparable quality. As a secondary investment objective, the Fund will seek
capital appreciation, but only when consistent with its primary objective. The
ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific industry or
region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the counter, are valued at the closing bid price
or in the absence of such price, as determined in good faith by the Board of
Directors of the Fund. Any security for which the primary market is on an
exchange is valued at the last sales price on such exchange on the day of
valuation, or, if there was no sale on such day, the closing bid price.
Securities for which no trades have taken place that day and unlisted
securities for which market quotations are readily available are valued at the
latest bid price.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Cash Flow Information: The Fund invests in securities and pays dividends from
net investment income and distributions from net realized gains which are paid
in cash or are reinvested at the discretion of shareholders. These activities
are reported in the Statement of Changes in Net Assets and additional
information on cash receipts and cash payments is presented in the Statement
of Cash Flows. Accounting practices that do not affect reporting activities on
a cash basis include carrying investments at value and amortizing discounts on
debt obligations. Cash, as used in the Statement of Cash Flows, is the amount
reported as "Cash" in the Statement of Assets and Liabilities.
Securities Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized gains and losses from securities
transactions are calculated on the identified cost basis. Interest income,
which is comprised of three elements; stated coupon rate, original issue
discount and market discount, is recorded on an accrual basis. Dividend income
is recorded on the ex-dividend date. Expenses are recorded on the accrual
basis which may require the use of certain estimates by management.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income tax provision is required.
Dividends and Distributions: The Fund expects to declare and pay dividends of
net investment income monthly and make distributions at least annually of any
net capital gains. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
See Notes to Financial Statements.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has agreements with the Investment Adviser and with Prudential
Investments Fund Management LLC (the "Administrator"). The Investment Adviser
makes investment decisions on behalf of the Fund; the Administrator provides
occupancy and certain clerical and accounting services to the Fund. The Fund
bears all other costs and expenses.
The investment advisory agreement provides for the Investment Adviser to
receive a fee, computed weekly and payable monthly at an annual rate of .50%
of the Fund's average weekly net assets. The administration agreement provides
for the Administrator to receive a fee, computed weekly and payable monthly at
an annual rate of .20% of the Fund's average weekly net assets.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the six months ended September 30, 1998, were $68,725,884 and
$67,041,302, respectively.
During the six months ended September 30, 1998, the Fund entered into $533,688
of securities transactions on a principal basis with Prudential Securities
Incorporated, an affiliate of the Administrator.
The federal income tax basis of the Fund's investments, as of September 30,
1998, was $130,882,544 and, accordingly, net unrealized depreciation for
federal income tax purposes was $19,364,231 (gross unrealized appreciation--
$751,829; gross unrealized depreciation--($20,116,060)).
For federal income tax purposes, the Fund has a capital loss carryforward as
of March 31, 1998 of approximately $3,143,000 of which $1,337,000 expires in
2003 and $1,806,000 expires in 2004. Accordingly, no capital gains
distributions are expected to be paid to shareholders until net gains have
been realized in excess of such carryforward.
NOTE 4. BORROWINGS
The Fund has a credit agreement with an unaffiliated lender. The maximum
commitment under this agreement is $35,000,000. Interest on any such
borrowings is based on market rates and is payable at maturity. The average
daily balance outstanding during the six months ended September 30, 1998 was
$32,000,000 at a weighted average interest rate of 6.37%. The maximum face
amount of borrowings outstanding at any month-end during the six months ended
September 30, 1998 was $32,000,000. The current borrowings of $32,000,000 (at
a weighted average interest rate of 6.23%) mature throughout the period from
October 8, 1998 to March 29, 1999.
The Fund has paid commitment fees at an annual rate of .09 of 1% on any unused
portion of the credit facility. Commitment fees are included in "Loan
Interest" as reported on the Statement of Assets and Liabilities and on the
Statement of Operations.
NOTE 5. CAPITAL
There are 100 million shares of $.01 par value common stock authorized. During
the six months ended September 30, 1998 and the fiscal year ended March 31,
1998, the Fund issued 18,829 and 98,012 shares in connection with reinvestment
of dividends, respectively.
NOTE 6. DIVIDENDS
On August 7, 1998 the Board of Directors of the Fund declared dividends of
$0.0725 per share payable on October 9, November 13 and December 11 to
shareholders of record on September 30, October 30 and November 30,
respectively.
See Notes to Financial Statements.
F-15
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, --------------------------------------------
1998 1998 1997 1996 1995 1994
------------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 9.21 $ 8.54 $ 8.44 $ 7.85 $ 8.38 $ 8.48
-------- -------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .45 .84 .82 .84 .87 .90
Net realized and
unrealized gain (loss)
on investments......... (2.00) .67 .12 .59 (.54) (.15)
-------- -------- ------- ------- ------- -------
Total from
investment
operations......... (1.55) 1.51 .94 1.43 .33 .75
-------- -------- ------- ------- ------- -------
LESS DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income...... (.42) (.84) (.82) (.84) (.86) (.85)
Distributions in excess
of net investment
income................. -- -- (.02) -- -- --
-------- -------- ------- ------- ------- -------
Total dividends..... (.42) (.84) (.84) (.84) (.86) (.85)
-------- -------- ------- ------- ------- -------
Net asset value, end of
period(a).............. $ 7.24 $ 9.21 $ 8.54 $ 8.44 $ 7.85 $ 8.38
======== ======== ======= ======= ======= =======
Market price per share,
end of period (a)...... $ 8.00 $ 9.125 $ 9.00 $ 8.75 $ 8.00 $ 8.375
======== ======== ======= ======= ======= =======
TOTAL INVESTMENT
RETURN(b): (7.81)% 11.25% 13.38% 20.80% 6.33% 3.90%
======== ======== ======= ======= ======= =======
RATIO/SUPPLEMENTAL DATA:
Net assets, end of
period (000 omitted)... $ 82,311 $104,558 $96,042 $94,091 $86,704 $91,698
Average net assets (000
omitted)............... $106,099 $100,766 $95,946 $92,855 $87,734 $96,962
Ratio to average net
assets:
Expenses, before loan
interest, commitment
fees and nonrecurring
expenses............. .99%(c) 1.07% 1.08% 1.01% 1.11% 1.12%
Total expenses...... 2.84%(c) 2.44% 2.32% 2.29% 2.71% 2.01%
Net investment
income............. 9.65%(c) 9.41% 9.63% 10.18% 10.90% 10.15%
Portfolio turnover
rate................... 54% 112% 60% 60% 47% 100%
Total debt outstanding
at end of period (000
omitted)............... $ 32,000 $ 30,000 $18,000 $17,000 $19,000 $28,000
Asset coverage per
$1,000 of debt
outstanding............ $ 3,744 $ 4,485 $ 6,336 $ 6,535 $ 5,563 $ 4,275
</TABLE>
- ----------------
(a) NAV and market value are published in The Wall Street Journal each
Monday.
(b) Total investment return is calculated assuming a purchase of common stock
at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be
reinvested at prices obtained under the dividend reinvestment plan. This
calculation does not reflect brokerage commissions.
(c) Annualized.
Contained above is selected data for a share of common stock outstanding,
total investment return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined based upon
information provided in the financial statements and market price data for the
Fund's shares.
See Notes to Financial Statements.
F-16
<PAGE>
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
The annual meeting of shareholders of The High Yield Plus Fund, Inc. was held
on August 27, 1998 at the offices of Prudential Investments Fund Management
LLC, 751 Broad Street, Newark, New Jersey. The meeting was held for the
following purposes:
(1)To elect the following director to serve as follows:
<TABLE>
<CAPTION>
DIRECTOR CLASS TERM EXPIRING
-------- ----- ------- --------
<S> <C> <C> <C>
Eugene C. Dorsey...................................... 1 3 years 2001
</TABLE>
Directors whose term of office continued beyond this meeting are Douglas H.
McCorkindale and Thomas T. Mooney.
(2) To ratify the selection of PricewaterhouseCoopers LLP as independent
public accountants for the year ending March 31, 1999.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
DIRECTOR/AUDITOR VOTES FOR VOTES AGAINST VOTES WITHHELD ABSTENTIONS
---------------- --------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
(1) Eugene C. Dorsey...... 9,535,054 -- 146,875 --
(2) PricewaterhouseCoopers
LLP...................... 9,578,622 28,736 -- 74,571
</TABLE>
- -------------------------------------------------------------------------------
F-17
<PAGE>
OTHER INFORMATION (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN. Shareholders may elect to have all distributions
of dividends and capital gains automatically reinvested in Fund shares
(Shares) pursuant to the Fund's Dividend Reinvestment Plan (the Plan).
Shareholders who do not participate in the Plan will receive all distributions
in cash paid by check in United States dollars mailed directly to the
shareholders of record (or if the shares are held in street or other nominee
name, then to the nominee) by the custodian, as dividend disbursing agent.
Shareholders who wish to participate in the Plan should contact the Fund at
(800) 451-6788.
State Street Bank and Trust Co. (the Plan Agent) serves as agent for the
shareholders in administering the Plan. After the Fund declares a dividend or
capital gains distribution, if (1) the market price is lower than net asset
value, the participants in the Plan will receive the equivalent in Shares
valued at the market price determined as of the time of purchase (generally,
following the payment date of the dividend or distribution); or if (2) the
market price of Shares on the payment date of the dividend or distribution is
equal to or exceeds their net asset value, participants will be issued Shares
at the higher of net asset value or 95% of the market price. If net asset
value exceeds the market price of Shares on the valuation date or the Fund
declares a dividend or other distribution payable only in cash, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to
buy Shares in the open market. If, before the Plan Agent has completed its
purchases, the market price exceeds the net asset value per share, the average
per share purchase price paid by the Plan Agent may exceed the net asset value
per share, resulting in the acquisition of fewer shares than if the dividend
or distribution had been paid in shares issued by the Fund. The Fund will not
issue Shares under the Plan below net asset value.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below.
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Fund. There will be no brokerage commissions
charged with respect to shares issued directly by the Fund. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and distributions. The automatic reinvestment of
dividends and distributions will not relieve participants of any federal
income tax that may be payable on such dividends or distributions.
The Fund reserves the right to amend or terminate the Plan upon 90 days'
written notice to shareholders of the Fund.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent and will receive certificates for whole Shares and cash for
fractional Shares.
All correspondence concerning the Plan should be directed to the Plan Agent,
State Street Bank & Trust Company, P. O. Box 8200, Boston, MA 02266-8200.
- -------------------------------------------------------------------------------
F-18
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS--125.4%
CORPORATE BONDS--113.8%
- -------------------------------------------------------------------------------
AEROSPACE/DEFENSE--3.6%
Argo-Tech Corp., Sr. Sub.
Notes..................... B3 8.625% 10/01/07 $1,500 $1,533,750
K&F Industries, Inc., Sr.
Sub. Notes,
Ser. B.................... B3 9.25 10/15/07 750 783,750
Moog, Inc., Sr. Sub. Notes,
Ser. B.................... B2 10.00 5/01/06 1,340 1,450,550
----------
3,768,050
- -------------------------------------------------------------------------------
AUTOMOTIVE--4.1%
Accuride Corp., Sr. Sub.
Notes..................... B2 9.25 2/01/08 450 447,750
Federal-Mogul Corp., Sr.
Notes..................... Ba2 8.80 4/15/07 500 524,770
Johnstown America
Industries, Inc., Sr. Sub.
Notes..................... B3 11.75 8/15/05 1,500 1,676,250
Key Plastics, Inc., Sr.
Sub. Notes,
Ser. B.................... B3 10.25 3/15/07 750 796,875
LDM Technologies, Inc., Sr.
Sub. Notes, Ser. B........ B3 10.75 1/15/07 750 817,500
----------
4,263,145
- -------------------------------------------------------------------------------
BASIC INDUSTRIES-
MANUFACTURING--6.3%
Clark-Schwebel Inc., Sr.
Notes, Ser. B............. B2 10.50 4/15/06 465 520,800
Gaylord Container Corp.,
Sr. Notes................. B3 9.375 6/15/07 1,000 1,000,000
Great Lakes Carbon Corp.,
Sr. Sec. Notes............ Ba3 10.00 1/01/06 1,000 1,095,000
International Wire Group,
Inc., Sr. Sub. Notes...... B3 11.75 6/01/05 750 832,500
Neenah Corp., Sr. Sub.
Notes, Ser. B............. B3 11.125 5/01/07 750 830,625
Roller Bearing Co. Amer.
Inc., Sr. Sub. Notes,
Ser. B.................... B3 9.625 6/15/07 750 770,625
Thermadyne Holdings Corp.,
Sr. Notes................. B1 10.25 5/01/02 750 780,000
UNICCO Service Co./UNICCO
Fin. Corp., Sr. Sub.
Notes, Ser. B............. B3 9.875 10/15/07 750 768,750
----------
6,598,300
- -------------------------------------------------------------------------------
BUILDING & RELATED
INDUSTRIES--0.8%
Amtrol Inc., Sr. Sub.
Notes..................... B3 10.625 12/31/06 500 518,750
Nortek Inc., Sr. Notes,
Ser. B.................... B1 9.25 3/15/07 350 364,000
----------
882,750
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CABLE--5.2%
Adelphia Communications
Corp., Sr. Notes, Ser. B.. B3 9.875% 3/01/07 $ 500 $ 545,000
Century Communications
Corp., Sr. Disc. Notes.... Ba3 Zero 1/15/08 1,250 550,000
CSC Holdings, Inc., Sr.
Deb., Ser. B.............. Ba2 8.125 8/15/09 250 261,875
Diamond Cable Co., Sr.
Disc. Notes, Zero Coupon
(until 2/15/02) (United
Kingdom).................. B3 10.75 2/15/07 1,000+ 707,500
Diamond Holdings, PLC, Sr.
Notes
(United Kingdom).......... B3 9.125 2/01/08 240+ 246,600
Falcon Holding Group L.P.,
Sr. Deb................... B2 8.375 4/15/10 845 842,735
Frontiervision Holdings
L.P., Sr. Disc. Notes,
Zero Coupon (until
9/15/01).................. B## 11.875 9/15/07 1,500 1,166,250
Rifkin Acquisition Partners
L.L.L.P., Sr. Sub. Notes.. B3 11.125 1/15/06 1,000 1,110,000
----------
5,429,960
- -------------------------------------------------------------------------------
CHEMICALS--4.5%
Acetex Corp., Sr. Sec.
Notes (Canada)............ B1 9.75 10/01/03 750+ 776,250
Huntsman Corp., Sr. Sub.
Notes, F.R.N.............. B2 9.125 7/01/07 250 250,000
Laroche Industries, Inc.,
Sr. Sub. Notes............ B3 9.50 9/15/07 1,000 987,500
PCI Chemicals Canada Inc.,
Sr. Sec. Notes, Ser. B
(Canada).................. B2 9.25 10/15/07 250+ 252,500
Pioneer Americas Acquisi-
tion Corp., Sr. Sec.
Notes, Ser. B............. B2 9.25 6/15/07 500 515,000
Sovereign Specialty Chemi-
cals, Sr. Sub. Notes...... B3 9.50 8/01/07 1,000 1,055,000
Terra Industries, Inc., Sr.
Notes..................... Ba3 10.50 6/15/05 250 275,000
Texas Petrochemicals Corp.,
Sr. Sub. Notes............ B3 11.125 7/01/06 500 551,250
----------
4,662,500
- -------------------------------------------------------------------------------
CONSUMER GOODS & SERVICES--
1.5%
Chattem Inc., Sr. Sub.
Notes..................... B2 8.875 4/01/08 425 430,313
Muzak L.P., Muzak Capital,
Sr. Notes................. Ba3 10.00 10/01/03 500 522,500
Revlon Worldwide, Sr. Sec.
Disc. Notes, Ser. B....... B3 Zero 3/15/01 750 573,750
----------
1,526,563
- -------------------------------------------------------------------------------
CONTAINERS--3.3%
BWay Corp., Sr. Sub. Notes,
Ser. B.................... B2 10.25 4/15/07 750 825,000
Calmar Inc., Sr. Sub.
Notes, Ser. B............. B3 11.50 8/15/05 500 531,250
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONTAINERS (CONT'D.)
Silgan Holdings Inc.
Sr. Sub. Deb............. B1 9.00% 6/01/09 $1,750 $1,837,500
Sub. Deb., PIK........... NR 13.25 7/15/06 200 226,289
----------
3,420,039
- -------------------------------------------------------------------------------
ENERGY & RELATED GOODS & SERVICES--
11.0%
Abraxas Petroleum Corp.,
Sr. Notes,
Ser. B.................... B2 11.50 11/01/04 1,500 1,545,000
Costilla Energy Inc.,
Sr. Notes................ B2 10.25 10/01/06 875 888,125
Sr. Sub. Notes........... B2 10.25 10/01/06 375 380,625
Cross Timbers Oil Co., Sr.
Sub. Notes, Ser. B........ B2 9.25 4/01/07 1,250 1,296,875
Kelley Oil And Gas Corp.,
Sr. Sub. Notes, Ser. B.... B3 10.375 10/15/06 500 517,500
Petroleos Mexicanos, Global
Gtd. Notes (Mexico)....... Ba2 8.85 9/15/07 1,500+ 1,511,250
Plains Resources, Inc., Sr.
Sub. Notes................ B2 10.25 3/15/06 1,500 1,612,500
Pride Petroleum Services,
Inc., Sr. Notes........... Ba3 9.375 5/01/07 315 337,050
RAM Energy, Inc., Sr.
Notes..................... B3 11.50 2/15/08 1,750 1,741,250
Tatneft Finance, Gtd. Bonds
(Russia).................. Ba3 9.00 10/29/02 750+ 682,500
Transportadora de Gas del
Sur, S.A., Notes
(Argentina)............... Ba3 10.25 4/25/01 250+ 260,937
Wainoco Oil Corp., Sr.
Notes..................... B1 9.125 2/15/06 750 753,750
----------
11,527,362
- -------------------------------------------------------------------------------
FINANCIAL SERVICES--13.1%
Bangkok Bank Public Co.,
Deb. (Thailand)........... Ba1 7.25 9/15/05 1,000+ 878,300
Chevy Chase Svgs. Bank,
F.S.B.,
Sub. Deb.................. B1 9.25 12/01/08 500 522,500
Emergent Group Inc., Sr.
Notes,
Ser. B.................... B3 10.75 9/15/04 1,000 942,500
First Nationwide Holdings,
Inc.,
Sr. Notes................. B3 12.50 4/15/03 750 855,000
FirstFed Financial Corp.,
Notes..................... B2 11.75 10/01/04 500 540,000
Guangdong Enterprises
Hldgs., Ltd. (China),
Sr. Notes................ Baa3 8.875 5/22/07 250+ 224,182
Sr. Notes................ Baa3 8.875 5/22/07 900+ 806,625
Hawthorne Financial Corp.,
Notes..................... NR 12.50 12/31/04 1,250 1,284,375
Olympic Financial Ltd., Sr.
Notes..................... B2 11.50 3/15/07 1,500@ 1,477,500
Resource America, Inc., Sr.
Notes..................... Caa 12.00 8/01/04 1,500 1,593,750
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES
(CONT'D.)
Southern Pacific Funding
Corp., Sr. Notes......... B3 11.50% 11/01/04 $ 350 $ 346,500
Superior Nat'l. Cap. Trust
I........................ B1 10.75 12/1/17 1,135 1,205,938
Thai Farmers Bank Ltd.,
Sub. Notes (Thailand).... Ba1 8.25 8/21/16 1,500+ 1,288,650
Unibanco-Uniao de Bancos
Brasileiros S.A., Unsub.
Notes (Brazil)........... B1 8.00 3/06/00 250+ 245,000
Western Financial Svgs.
Bank, F.S.B., Sub. Cap.
Deb...................... B1 8.875 8/01/07 1,500 1,440,000
-----------
13,650,820
- -------------------------------------------------------------------------------
FOOD & LODGING--3.9%
Aurora Foods Inc., Sr.
Sub. Notes,
Ser. D................... B3 9.875 2/15/07 230 247,250
Capstar Hotel Co., Sr.
Sub. Notes............... B1 8.75 8/15/07 500 517,500
Del Monte Foods Co., Sr.
Disc. Notes, Zero Coupon
(until 12/15/02)......... Caa 12.50 12/15/07 1,400 924,000
Eagle Family Foods Inc.,
Sr. Sub. Notes........... B3 8.75 1/15/08 350 350,000
John Q. Hammons Hotels,
First Mtge. Bonds........ B1 8.875 2/15/04 2,070 2,095,875
-----------
4,134,625
- -------------------------------------------------------------------------------
GAMING--3.5%
Argosy Gaming Co., First
Mtge. Notes.............. B2 13.25 6/01/04 500 557,500
Fitzgeralds Gaming Corp.,
Sr. Sec. Notes........... B3 12.25 12/15/04 1,000 1,020,000
Hollywood Casino Corp.,
Sr. Sec. Notes........... B2 12.75 11/01/03 1,000 1,105,000
Lady Luck Gaming Corp.,
First Mtge. Notes........ B2 11.875 3/01/01 1,000 1,030,000
-----------
3,712,500
- -------------------------------------------------------------------------------
GROCERY STORES--1.6%
Homeland Stores, Inc., Sr.
Sub. Notes............... NR 10.00 8/01/03 1,000 940,000
Pathmark Stores, Inc.,
Sub. Notes............... Caa 11.625 6/15/02 750 744,375
-----------
1,684,375
- -------------------------------------------------------------------------------
HEALTH CARE--4.3%
Columbia/HCA Healthcare
Corp., Notes............. Ba2 7.25 5/20/08 1,000 947,280
Owens & Minor Inc., Sr.
Sub. Notes............... B1 10.875 6/01/06 1,000 1,117,000
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE (CONT'D.)
Pharmerica Inc., Sr. Sub.
Notes...................... B2 8.375% 4/01/08 $ 625 $ 628,125
Universal Hospital Svcs.,
Sr. Notes.................. B3 10.25 3/01/08 1,750 1,798,125
----------
4,490,530
- --------------------------------------------------------------------------------
HOME BUILDER & REAL ESTATE--
2.9%
BF Saul Real Estate
Investment Trust, Sr. Sec.
Notes...................... B3## 9.75 4/01/08 500 503,750
Kaufman & Broad Home Corp.,
Sr. Sub. Notes............. Ba3 9.625 11/15/06 500 532,500
Presley Companies, Sr.
Notes...................... B3 12.50 7/01/01 1,000 960,000
Standard Pacific Corp., Sr.
Notes...................... Ba2 8.50 6/15/07 750 765,000
Toll Corp., Sr. Sub. Notes.. Ba3 7.75 9/15/07 250 250,625
----------
3,011,875
- --------------------------------------------------------------------------------
MEDIA & COMMUNICATIONS--9.5%
Allbritton Communications
Co., Sr. Sub. Notes........ B3 8.875 2/01/08 350 353,500
Big Flower Press Holdings
Inc., Sr. Sub. Notes....... B2 8.875 7/01/07 500 510,000
Chancellor Media Corp., Sr.
Sub. Notes................. B2 9.375 10/01/04 500 530,000
Echostar DBS Corp., Sr. Sec.
Notes...................... Caa 12.50 7/01/02 900 1,019,250
Fox/Liberty Networks L.L.C.,
Sr. Disc. Notes, Zero
Coupon (until 8/15/02)..... B1 9.75 8/15/07 1,500 1,020,000
Globo Comunicacoes e
Participacoes S.A., Notes
(Brazil)................... B1 10.50 12/20/06 1,250+ 1,270,312
Innova S de R.L., Sr. Notes
(Mexico)................... B2 12.875 4/01/07 1,000+ 1,067,500
Jacor Communications, Inc.
Sr. Sub. Notes............. B2 9.75 12/15/06 250 273,750
Sr. Sub. Notes............. B2 8.00 2/15/10 270 271,688
JCAC, Inc., Sr. Sub. Notes.. B2 10.125 6/15/06 250 274,375
Liberty Group Publishing
Inc., Sr. Disc. Notes, Zero
Coupon (until 2/1/03)...... Caa 11.625 2/01/09 415 254,188
Net Sat Servicos Ltda., Sr.
Sec. Notes (Brazil)........ B2 12.75 8/05/04 285+ 292,125
Sullivan Graphics Inc., Sr.
Sub. Notes................. Caa 12.75 8/01/05 1,000 1,057,500
Tevecap S.A., Sr. Notes
(Brazil)................... B2 12.625 11/26/04 1,250+ 1,265,625
TV Azteca S.A. de CV, Gtd.
Sr. Notes (Brazil)......... Ba3 10.50 2/15/07 500+ 532,500
----------
9,992,313
- --------------------------------------------------------------------------------
METALS--4.8%
Acindar Industria Argentina
de Aceros S.A., Notes
(Argentina)................ B2 11.25 2/15/04 750+ 795,000
AK Steel Corp., Sr. Notes... Ba2 9.125 12/15/06 500 535,625
Armco, Inc., Sr. Notes...... B2 9.00 9/15/07 250 260,625
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE (CONT'D.)
Companhia Vale do Rio Doce,
Notes (Brazil)............ NR 10.00% 4/02/04 $ 750+ $ 768,750
CSN Iron S.A., Gtd. Notes
(Brazil).................. B1 9.125 6/01/07 1,250+ 1,170,313
GS Technologies Operating
Co., Inc., Sr. Notes...... B2 12.25 10/01/05 350 393,750
Weirton Steel Corp., Sr.
Notes..................... B2 11.375 7/01/04 1,000 1,082,500
----------
5,006,563
- -------------------------------------------------------------------------------
PAPER & PACKAGING--11.1%
APP Int'l. Finance Co.,
Sec. Notes (Indonesia).... Caa 11.75 10/01/05 750+ 720,000
Aracruz Celulose S.A.,
(Brazil),
Notes..................... B1 10.375 1/31/02 1,035+ 1,068,637
Notes..................... B1 10.375 1/31/02 715+ 738,238
Bahia Sul Celulose S.A.,
Notes (Brazil)............ NR 10.625 7/10/04 500+ 497,500
Container Corp. of America,
Sr. Notes................. B1 9.75 4/01/03 1,000 1,075,000
Sr. Notes, Ser. B......... B1 10.75 5/01/02 1,000 1,100,000
Doman Industries Ltd., Sr.
Notes (Canada)............ B1 8.75 3/15/04 750+ 747,187
Fonda Group Inc., Sr. Sub.
Notes, Ser. B............. B3 9.50 3/01/07 750 735,000
Grupo Industrial Durango,
S.A. de C.V., Notes....... B1 12.625 8/01/03 350 397,688
Klabin Fabricadora de Papel
e Celulose S.A., Gtd.
Notes (Brazil)............ NR 11.00 8/12/04 1,000+ 1,006,250
Pindo Deli Finance
Mauritius Ltd., Gtd. Sr.
Notes (Indonesia)......... Caa 10.75 10/01/07 1,250+ 1,012,500
Repap New Brunswick, Inc.,
Sr. Sec. Notes (Canada)... Caa 10.625 4/15/05 1,500+ 1,515,000
S.D. Warren Co., Sr. Sub.
Notes, Ser. B............. B1 12.00 12/15/04 350 390,250
Tembec Finance Corp., Sr.
Notes (Canada)............ B1 9.875 9/30/05 500+ 530,000
----------
11,533,250
- -------------------------------------------------------------------------------
TECHNOLOGY--4.6%
Advanced Micro Devices,
Inc., Sr. Sec. Notes...... Ba1 11.00 8/01/03 750 804,375
Concentric Network Corp.,
Notes..................... NR 12.75 12/15/07 255@ 300,900
DecisionOne Corp., Sr. Sub.
Notes..................... B3 9.75 8/01/07 500 487,500
DecisionOne Holdings Corp.,
Sr. Disc. Deb., Zero
Coupon (until 8/1/02)..... Caa 11.50 8/01/08 1,000@ 600,000
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TECHNOLOGY (CONT'D.)
Fairchild Semiconductor
Corp., Sr. Sub. Notes...... B2 10.125% 3/15/07 $ 500 $ 522,500
Pierce Leahy Corp., Sr. Sub.
Notes...................... B3 9.125 7/15/07 500 525,000
Unisys Corp., Sr. Notes,
Ser. B..................... B1 12.00 4/15/03 500 565,000
Verio Inc., Sr. Notes....... NR 10.375 4/01/05 960 998,400
----------
4,803,675
- ---------------------------------------------------------------------------------
TELECOMMUNICATIONS--12.6%
Advanced Radio Telecom
Corp., Sr. Notes........... Caa## 14.00 2/15/07 850 935,000
American Communications
Services, Sr. Disc. Notes,
Zero Coupon
(until 4/1/01)............. NR 12.75 4/01/06 750 596,250
American Mobile Satellite
Corp., Notes............... NR 12.25 4/01/08 280@ 290,500
BTI Telecom Corp., Sr.
Notes...................... B2 10.50 9/15/07 890 927,825
Clearnet Communications,
Inc., Sr. Disc. Notes, Zero
Coupon (until 12/15/00)
(Canada)................... B3 14.75 12/15/05 750+ 620,625
GST Telecommunications,
Inc., Sr. Sub. Notes, Zero
Coupon (until 11/15/02).... NR 12.75 11/15/07 635 768,350
Hyperion Telecommunications
Inc., Sr. Disc. Notes, Zero
Coupon
(until 4/15/01)............ B3 13.00 4/15/03 350 269,500
Sr. Sec. Notes, Ser. B..... B3 12.25 9/01/04 715 807,950
Intermedia Communications
Inc.,
Sr. Notes.................. B2 8.50 1/15/08 150 157,125
Sr. Notes, Ser. B.......... B2 8.875 11/01/07 350 371,875
Iridium L.L.C./Iridium
Capital Corp.,
Sr. Notes, Ser. C.......... B3 11.25 7/15/05 1,000 1,061,250
ITC Deltacom Inc., Sr.
Notes...................... B2 8.875 3/01/08 700 710,500
Korea Telecom (South Korea),
Notes...................... Ba1 7.50 6/01/06 500+ 438,675
Notes...................... Ba1 7.625 4/15/07 1,000+ 878,690
McLeodUSA Inc.,
Sr. Notes.................. B2 9.25 7/15/07 500 535,000
Sr. Notes.................. B2 8.375 3/15/08 140 145,250
MGC Communications Inc., Sr.
Sec. Notes, Ser. B......... Caa 13.00 10/01/04 500 517,500
MobileMedia Communications,
Inc., Sr. Sub. Notes....... C 9.375 11/01/07 2,000** 230,000
- ---------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-25
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS
(CONT'D.)
Philippine Long Dist. Tel.
Co., Notes (The
Philippines)............. Ba2 7.85% 3/06/07 $1,750+ $ 1,631,875
Winstar Communications,
Inc., Sr. Disc. Notes,
Zero Coupon (until
10/15/00)................ NR 14.00 10/15/05 1,500 1,260,000
------------
13,153,740
- --------------------------------------------------------------------------------
TEXTILES--0.2%
Polysindo Int'l. Finance
Co., Notes (Indonesia)... Caa 11.375 6/15/06 350+ 234,500
- --------------------------------------------------------------------------------
TRANSPORTATION--0.9%
MRS Logistica S.A., Notes
(Brazil)................. B1## 10.625 8/15/05 500+ 490,000
Valujet Inc., Sr. Notes... B3 10.25 4/15/01 500 475,000
------------
965,000
- --------------------------------------------------------------------------------
UTILITIES--0.5%
Inversora Electrica de
Buenos Aires S.A., Sr.
Notes, Ser. B
(Argentina).............. Ba1## 9.00 9/16/04 500+ 496,250
------------
Total corporate bonds
(cost $116,837,701)...... 118,948,685
- --------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS+--7.2%
Republic of Argentina,
Global Bonds............ Ba3 11.00 10/09/06 1,750 1,946,875
Global Bonds............ Ba3 8.375 12/20/03 500 497,500
Global Bonds............ Ba3 11.375 1/30/17 500 565,625
Republic of Brazil, Ser.
C........................ B1 4.50 4/15/14 2,317 1,949,477
Republic of Columbia,
Global Bonds............. Baa3 8.375 2/15/27 1,750 1,620,605
Republic of Venezuela,
Bonds.................... Ba2 9.25 9/15/27 1,000 907,500
---- ------ -------- ------ ------------
Total foreign government
obligations (cost
$6,786,157).............. 7,487,582
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1998 THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S
RATING INTEREST EXPIRATION VALUE
DESCRIPTION (UNAUDITED) RATE DATE SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREFERRED STOCKS--4.4%
Chevy Chase Capital
Corp., Noncumulative
Exchangeable,
Ser. A................. B1 10.375% -- 10,000 $ 536,250
Fairfield Mfg. Inc.,
Cumulative
Exchangeable, PIK...... B3 11.25 -- 1,000 1,045,000
Fitzgeralds Gaming
Corp., Cumulative
Redeemable............. Ca 15.00 -- 10,000@ 340,000
Granite Broadcasting
Corp., Cumulative
Exchangeable, PIK...... B1## 12.75 -- 566 647,820
IXC Communications Inc.,
Jr. Conv., PIK......... NR 12.50 -- 670 817,782
Lady Luck Gaming Corp.,
Ser. A................. NR 11.50 -- 7,000 273,000
SF Holdings Group Inc.,
Exchangeable, PIK...... NR 13.75 -- 110@ 1,006,500
------------
Total preferred stocks
(cost $4,369,565)...... 4,666,352
- --------------------------------------------------------------------------------
<CAPTION>
WARRANTS
--------
<S> <C> <C> <C> <C> <C>
WARRANTS*
Benedek Communications
Corp.
(cost $0; acquired
10/17/96).............. NR -- 7/1/07 5,500 11,000
MGC Communications,
Inc.................... NR -- 10/1/20 500 17,500
------------
Total warrants (cost
$17,500)............... 28,500
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS--
125.4%
(cost $128,010,923;
Note 3)............... 131,131,119
Liabilities in excess of
other assets--(25.4)%.. (26,572,747)
------------
Net Assets--100%........ $104,558,372
============
</TABLE>
- ----------------
*--Non-income-producing security.
**--Represents issuer in default on interest payments; non-income-
producing security.
##--S&P Equivalent to Moody's Rating.
+--US$ Denominated Foreign Bonds.
@--Consists of more than 1 class of securities traded together as a unit;
generally bonds with attached stock or warrants.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in Kind.
L.L.C.--Limited Liability Corporation.
L.L.L.P.--Limited Liability Limited Partnership.
L.P.--Limited Partnership.
F.R.N.--Floating Rate Note.
See Notes to Financial Statements.
F-27
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
ASSETS
Investments, at value (cost $128,010,923)...................... $131,131,119
Cash........................................................... 2,699,939
Receivable for investments sold................................ 5,444,774
Interest and dividends receivable.............................. 2,910,517
Other assets................................................... 54,770
------------
Total assets............................................... 142,241,119
------------
LIABILITIES
Loan payable (Note 4).......................................... 30,000,000
Payable for investments purchased.............................. 6,484,839
Dividends payable.............................................. 795,221
Loan interest payable (Note 4)................................. 245,672
Accrued expenses............................................... 83,301
Advisory fee payable........................................... 44,190
Administration fee payable..................................... 17,676
Deferred directors' fees....................................... 11,848
------------
Total liabilities.......................................... 37,682,747
------------
NET ASSETS..................................................... $104,558,372
============
Net assets were comprised of:
Common stock, at par......................................... $ 113,485
Paid-in capital in excess of par............................. 104,157,299
------------
104,270,784
Undistributed net investment income.......................... 310,599
Accumulated net realized loss on investments................. (3,143,207)
Net unrealized appreciation of investments................... 3,120,196
------------
Net assets, March 31, 1998................................... $104,558,372
============
Net asset value per share ($104,558,372/11,348,544 shares of
common stock issued and outstanding).......................... $9.21
=====
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE>
THE HIGH YIELD PLUS FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1998
--------------
<S> <C>
NET INVESTMENT INCOME
Income
Interest....................................................... $11,712,150
Dividends...................................................... 225,226
-----------
11,937,376
-----------
Expenses
Investment advisory fee........................................ 505,151
Administration fee............................................. 202,061
Custodian's fees and expenses.................................. 106,000
Legal fees and expenses........................................ 75,000
Reports to shareholders........................................ 57,000
Transfer agent's fees and expenses............................. 39,000
Audit fee...................................................... 27,000
Insurance expense.............................................. 25,000
Listing fee.................................................... 25,000
Directors' fees and expenses................................... 12,000
Miscellaneous.................................................. 10,650
-----------
Total operating expenses..................................... 1,083,862
Loan interest expense (Note 4)................................. 1,374,351
-----------
Total expenses............................................... 2,458,213
-----------
Net investment income............................................ 9,479,163
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment transactions..................... 5,009,438
Net change in unrealized appreciation of investments............. 2,649,914
-----------
Net gain on investments.......................................... 7,659,352
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $17,138,515
===========
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE>
THE HIGH YIELD PLUS FUND, INC.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1998
--------------
<S> <C>
INCREASE (DECREASE) IN CASH
Cash flows used for operating activities
Interest and dividends received (excluding discount
amortization of $615,950)................................... $ 11,106,041
Operating expenses paid...................................... (823,577)
Loan interest and commitment fee paid........................ (1,515,806)
Maturities of short-term portfolio investments, net.......... 1,350,000
Purchases of long-term portfolio investments................. (139,142,949)
Proceeds from disposition of long-term portfolio
investments................................................. 128,334,987
Deferred expenses and other assets........................... 5,678
-------------
Net cash used for operating activities....................... (685,626)
-------------
Cash provided from financing activities
Net increase in notes payable................................ 12,000,000
Cash dividends paid (excluding reinvestment of dividends of
$876,479)................................................... (8,614,779)
-------------
Net cash provided from financing activities.................. 3,385,221
-------------
Net increase in cash......................................... 2,699,595
Cash at beginning of year.................................... 344
-------------
Cash at end of year.......................................... $ 2,699,939
=============
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET CASH USED
FOR OPERATING ACTIVITIES
Net increase in net assets resulting from operations........... $ 17,138,515
-------------
Increase in investments........................................ (10,955,944)
Net realized gain on investment transactions................... (5,009,438)
Net change in unrealized appreciation of investments........... (2,649,914)
Increase in receivable for investments sold.................... (4,484,405)
Increase in interest and dividends receivable.................. (215,385)
Decrease in deferred expenses and other assets................. 5,678
Increase in payable for investments purchased.................. 5,366,437
Increase in accrued expenses and other liabilities............. 118,830
-------------
Total adjustments............................................ (17,824,141)
-------------
Net cash used for operating activities....................... $ (685,626)
=============
</TABLE>
See Notes to Financial Statements.
F-30
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS THE HIGH YIELD PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income............................ $ 9,479,163 $ 9,238,631
Net realized gain on investment transactions..... 5,009,438 2,559,619
Net change in unrealized
appreciation/depreciation of investments........ 2,649,914 (1,353,218)
------------ -----------
Net increase in net assets resulting from
operations...................................... 17,138,515 10,445,032
Dividends from net investment income............... (9,479,163) (9,238,631)
Distributions in excess of net investment income... (19,779) (170,811)
Value of Fund shares issued to shareholders in
reinvestment of dividends......................... 876,479 915,455
------------ -----------
Total increase..................................... 8,516,052 1,951,045
NET ASSETS
Beginning of year.................................. 96,042,320 94,091,275
------------ -----------
End of year........................................ $104,558,372 $96,042,320
============ ===========
</TABLE>
See Notes to Financial Statements.
F-31
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
The High Yield Plus Fund, Inc. (the "Fund") was organized in Maryland on
February 3, 1988, as a diversified, closed-end management investment company.
The Fund had no transactions until April 4, 1988, when it sold 11,000 shares
of common stock for $102,300 to Wellington Management Company, LLP (the
"Investment Adviser"). Investment operations commenced on April 22, 1988. The
Fund's primary objective is to provide a high level of current income to
shareholders. The Fund seeks to achieve this objective through investment in
publicly or privately offered high yield debt securities rated in the medium
to lower categories by recognized rating services or nonrated securities of
comparable quality. As a secondary investment objective, the Fund will seek
capital appreciation, but only when consistent with its primary objective. The
ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific industry or
region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the closing bid price
or in the absence of such price, as determined in good faith by the Board of
Directors of the Fund. Any security for which the primary market is on an
exchange is valued at the last sales price on such exchange on the day of
valuation or, if there was no sale on such day, the closing bid price.
Securities for which no trades have taken place that day and unlisted
securities for which market quotations are readily available are valued at the
latest bid price.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Cash Flow Information: The Fund invests in securities and pays dividends from
net investment income and distributions from net realized gains which are paid
in cash or are reinvested at the discretion of shareholders. These activities
are reported in the Statement of Changes in Net Assets and additional
information on cash receipts and cash payments is presented in the Statement
of Cash Flows. Accounting practices that do not affect reporting activities on
a cash basis include carrying investments at value and amortizing discounts on
debt obligations. Cash, as used in the Statement of Cash Flows, is the amount
reported as "Cash" in the Statement of Assets and Liabilities.
Securities Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized gains and losses from securities
transactions are calculated on the identified cost basis. Interest income,
which is comprised of three elements; stated coupon rate, original issue
discount and market discount, is recorded on an accrual basis. Dividend income
is recorded on the ex-dividend date. Expenses are recorded on the accrual
basis which may require the use of certain estimates by management.
Taxes. It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income tax provision is required.
Dividends and Distributions. The Fund expects to declare and pay dividends of
net investment income monthly and make distributions at least annually of any
net capital gains. Dividends and distributions are recorded on the ex-dividend
date.
F-32
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
NOTE 2. AGREEMENTS
The Fund has agreements with the Investment Adviser and with Prudential
Investments Fund Management LLC (the "Administrator"). The Investment Adviser
makes investment decisions on behalf of the Fund; the Administrator provides
occupancy and certain clerical and accounting services to the Fund. The Fund
bears all other costs and expenses.
The investment advisory agreement provides for the Investment Adviser to
receive a fee, computed weekly and payable monthly at an annual rate of .50%
of the Fund's average weekly net assets. The administration agreement provides
for the Administrator to receive a fee, computed weekly and payable monthly at
an annual rate of .20% of the Fund's average weekly net assets.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the year ended March 31, 1998, were $144,503,792 and
$132,812,163, respectively.
During the year ended March 31, 1998, the Fund entered into $1,716,750 of
securities transactions on a principal basis with Prudential Securities
Incorporated, an affiliate of the Administrator.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of March 31,
1998, net unrealized appreciation for federal income tax purposes was
$3,120,196 (gross unrealized appreciation--$5,238,705; gross unrealized
depreciation--$2,118,509).
For federal income tax purposes, the Fund has a capital loss carryforward as
of March 31, 1998 of approximately $3,143,000 of which $1,337,000 expires in
2003 and $1,806,000 expires in 2004. Such carryforward is after utilization of
approximately $5,010,000 of net taxable gains realized and recognized during
the year ended March 31, 1998. Accordingly, no capital gains distributions are
expected to be paid to shareholders until net gains have been realized in
excess of such carryforward.
NOTE 4. BORROWINGS
The Fund has a credit agreement with an unaffiliated lender. The maximum
commitment under this agreement is $30,000,000. Interest on any such
borrowings is based on market rates and is payable at maturity. The average
daily balance outstanding during the year ended March 31, 1998 was $21,027,397
at a weighted average interest rate of 6.54%. The maximum face amount of
borrowings outstanding at any month end during the year ended March 31, 1998
was $30,000,000. The current borrowings of $30,000,000 (at a weighted average
interest rate of 6.28%) mature throughout the period from April 3, 1998 to
September 28, 1998.
The Fund has paid commitment fees at an annual rate of .10 of 1% on any unused
portion of the credit facility. Commitment fees are included in "Loan
Interest" as reported on the Statement of Assets and Liabilities and on the
Statement of Operations.
F-33
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
NOTE 5. CAPITAL
There are 100 million shares of $.01 par value common stock authorized. During
the fiscal years ended March 31, 1998 and 1997, the Fund issued 98,012 and
106,725 shares in connection with reinvestment of dividends, respectively.
NOTE 6. DIVIDENDS
On February 11, 1998 the Board of Directors of the Fund declared dividends of
$0.07 per share payable on April 9 and May 8, 1998 to shareholders of record
on March 31 and April 30, 1998, respectively.
F-34
<PAGE>
FINANCIAL HIGHLIGHTS THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year............................ $ 8.54 $ 8.44 $ 7.85 $ 8.38 $ 8.48
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............ .84 .82 .84 .87 .90
Net realized and unrealized gain
(loss) on investments........... .67 .12 .59 (.54) (.15)
-------- ------- ------- ------- -------
Total from investment
operations.................. 1.51 .94 1.43 .33 .75
-------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment
income.......................... (.84) (.82) (.84) (.86) (.85)
Distributions in excess of net
investment income............... -- (.02) -- -- --
-------- ------- ------- ------- -------
Total dividends.............. (.84) (.84) (.84) (.86) (.85)
-------- ------- ------- ------- -------
Net asset value, end of year(a).. $ 9.21 $ 8.54 $ 8.44 $ 7.85 $ 8.38
======== ======= ======= ======= =======
Market price per share, end of
year(a)......................... $ 9.125 $ 9.00 $ 8.75 $ 8.00 $ 8.375
======== ======= ======= ======= =======
TOTAL INVESTMENT RETURN(b): 11.25% 13.38% 20.80% 6.33% 3.90%
======== ======= ======= ======= =======
RATIO/SUPPLEMENTAL DATA:
Net assets, end of year (000
omitted)........................ $104,558 $96,042 $94,091 $86,704 $91,698
Average net assets (000
omitted)........................ $100,766 $95,946 $92,855 $87,734 $96,962
Ratio to average net assets:
Expenses, before loan interest,
commitment fees and
nonrecurring expenses......... 1.07% 1.08% 1.01% 1.11% 1.12%
Total expenses............... 2.44% 2.32% 2.29% 2.71% 2.01%
Net investment income........ 9.41% 9.63% 10.18% 10.90% 10.15%
Portfolio turnover rate.......... 112% 60% 60% 47% 100%
Total debt outstanding at end of
year (000 omitted).............. $ 30,000 $18,000 $17,000 $19,000 $28,000
Asset coverage per $1,000 of debt
outstanding..................... $ 4,485 $ 6,336 $ 6,535 $ 5,563 $ 4,275
</TABLE>
- ----------------
(a) NAV and market value are published in The Wall Street Journal each
Monday.
(b) Total investment return is calculated assuming a purchase of common stock
at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be
reinvested at prices obtained under the dividend reinvestment plan. This
calculation does not reflect brokerage commissions.
Contained above is selected data for a share of common stock outstanding,
total investment return, ratios to average net assets and other supplemental
data for the years indicated. This information has been determined based upon
information provided in the financial statements and market price data for the
Fund's shares.
See Notes to Financial Statements.
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
The High Yield Plus Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations, of cash flows and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The High Yield Plus Fund, Inc. (the "Fund") at March 31, 1998, the results of
its operations and its cash flows for the year then ended and the changes in
its net assets and the financial highlights for each of the two years in the
period then ended in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at March 31, 1998 by correspondence with the custodian and brokers
and the application of alternative auditing procedures where confirmations
from brokers were not received, provide a reasonable basis for the opinion
expressed above. The accompanying financial highlights for each of the three
years in the period ended March 31, 1996 were audited by other independent
accountants, whose opinion dated May 9, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
May 14, 1998
FEDERAL INCOME TAX INFORMATION (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of
the Fund's fiscal year end (March 31, 1998) that 2.23% of the dividends paid
in the fiscal year ended March 31, 1998 qualified for the corporate dividends
received deduction available to corporate taxpayers.
F-36
<PAGE>
OTHER INFORMATION (UNAUDITED) THE HIGH YIELD PLUS FUND, INC.
- -------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN. Shareholders may elect to have all distributions
of dividends and capital gains automatically reinvested in Fund shares
(Shares) pursuant to the Fund's Dividend Reinvestment Plan (the Plan).
Shareholders who do not participate in the Plan will receive all distributions
in cash paid by check in United States dollars mailed directly to the
shareholders of record (or if the shares are held in street or other nominee
name, then to the nominee) by the custodian, as dividend disbursing agent.
Shareholders who wish to participate in the Plan should contact the Fund at
(800) 451-6788.
State Street Bank and Trust Co. (the Plan Agent) serves as agent for the
shareholders in administering the Plan. After the Fund declares a dividend or
capital gains distribution, if (1) the market price is lower than net asset
value, the participants in the Plan will receive the equivalent in Shares
valued at the market price determined as of the time of purchase (generally,
following the payment date of the dividend or distribution); or if (2) the
market price of Shares on the payment date of the dividend or distribution is
equal to or exceeds their net asset value, participants will be issued Shares
at the higher of net asset value or 95% of the market price. If net asset
value exceeds the market price of Shares on the valuation date or the Fund
declares a dividend or other distribution payable only in cash, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to
buy Shares in the open market. If, before the Plan Agent has completed its
purchases, the market price exceeds the net asset value per share, the average
per share purchase price paid by the Plan Agent may exceed the net asset value
per share, resulting in the acquisition of fewer shares than if the dividend
or distribution had been paid in shares issued by the Fund. The Fund will not
issue Shares under the Plan below net asset value.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below.
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Fund. There will be no brokerage commissions
charged with respect to shares issued directly by the Fund. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and distributions. The automatic reinvestment of
dividends and distributions will not relieve participants of any federal
income tax that may be payable on such dividends or distributions.
The Fund reserves the right to amend or terminate the Plan upon 90 days'
written notice to shareholders of the Fund.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent and will receive certificates for whole Shares and cash for
fractional Shares.
All correspondence concerning the Plan should be directed to the Plan Agent,
State Street Bank & Trust Company, P.O. Box 8200, Boston, MA 02266-8200.
INVESTMENT POLICIES. Based on the evolution of the high yield market over the
past several years, the Fund has adopted certain non-fundamental changes to
its investment policies. The Fund may invest up to 25% of its total assets in
securities that are restricted as to disposition under the federal securities
laws or otherwise not readily marketable. Given the dramatic increase in the
number of securities issued under Rule 144A of the Securities Act of 1933,
securities eligible for resale but are otherwise liquid are no longer subject
to this limitation. In addition, given recent developments in the high yield
market, the Fund amended its investment policy regarding investment in foreign
securities to allow the Fund to invest up to 20% of its total assets in non-
U.S. dollar denominated high yield foreign debt securities.
F-37
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE
LONG-TERM RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuations or protective elements may be of
greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds which are Baa rated are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during other good and bad times
over the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
A-1
<PAGE>
Among the obligations covered are commercial paper, Eurocommercial paper, bank
deposits, bankers' acceptances and obligations to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and
bonds of indemnity are excluded unless explicitly rated.
Issuers rated Prime-l (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will- normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
PREFERRED STOCK RATINGS
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classifications, earnings and asset
protections are, nevertheless, expected to be maintained at adequate
levels.
baa An issue which is rated "baa" is considered to be medium grade
preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
A-2
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b
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be
small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payment.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
NOTE
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
A-3
<PAGE>
STANDARD & POOR'S CORPORATION
LONG-TERM ISSUE CREDIT RATINGS
AAA An obligation rated "AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment is EXTREMELY STRONG.
AA
An obligation rated "AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is VERY STRONG.
A An obligation rated "A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in the higher rated categories. However, the obligor's capacity
to meet its financial commitment is still STRONG.
BBB
An obligation rated "BBB' exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to meet its financial
commitment on the obligation.
Obligations rated "BB', "B', "CCC', "CC' and "C' are regarded as having
significant speculative characteristics. "BB' indicates the least degree of
speculation and "C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB' is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
B
An obligation rated "B' is MORE VULNERABLE to nonpayment than
obligations rated "BB,' but the obligor currently has the capacity
to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment
on the obligation.
CCC An obligation rated "CCC' is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet
its financial commitment.
CC
An obligation rated "CC' is CURRENTLY HIGHLY VULNERABLE to
nonpayment.
C The "C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
D An obligation rated "D' is in payment default. The "D' rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will
be made during such grace period. The "D' rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized
A-4
<PAGE>
PLUS (+) OR MINUS (-)
The ratings from "AA' to "CCC' may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard
& Poor's does not rate a particular type of obligation as a matter
of policy.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated "A-l' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category,
certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2 A short-term obligation rated "A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory
A-3 A short-term obligation rated "A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated "B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
C A short-term obligation rated "C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitment
on the obligation.
D A short-term obligation rated "D' is in payment default. The "D'
rating category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The "D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
DUAL RATING DEFINITIONS
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and
the second rating addressed only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the commercial
paper rating symbols for the put option (for example, AAA/A-I +). With short-
term demand debt, Standard & Poor's note rating symbols are used with the
commercial paper rating symbols (for example, SP-l +/A-l +).
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-l") or if the nominal maturity is short, a rating
of "SP-l +/AAA" is assigned.
A-5
<PAGE>
MUNICIPAL NOTES
A Standard & Poor's note ratings reflects the liquidity factors and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment:
-- Amortization schedule (the longer the final maturity relative to other
maturities the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the debt rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
l. Likelihood of payment--capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for
issues rated "AAA'.
A An issue rated "A' is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
A-6
<PAGE>
BBB
An issue rated "BBB' is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to make payments for preferred stock in this category than
for issues in the "A' category.
BB, B
CCC Preferred stock rated "BB', "B', or "CCC' is regarded, on balance,
as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations. "BB' indicates the lowest degree
of speculation and "CCC' the highest degree of speculation. While
such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CC The rating "CC' is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated "C' is a non-paying issue.
D A preferred stock rated "D' is a non-paying issue with the issuer in
default on debt instruments.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard
& Poor's does not rate a particular type of obligation as a matter
of policy.
PLUS (+) OR MINUS (-)
To provide more detailed indications of preferred stock quality, the ratings
from "AA' to "CCC' may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
A-7
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<PAGE>
APPENDIX B
CHARACTERISTICS OF OPTIONS AND FUTURES CONTRACTS AND ASSOCIATED RISKS
The writer of an option receives a premium which it retains whether or not the
option is exercised. The Fund's principal objective in writing options is to
realize, through the receipt of premiums, a greater return than would be
realized on the underlying securities alone.
The purchaser of a call option has the right, for a specified period of time,
to purchase the securities subject to the option at a specified price (the
"exercise price"). By writing a call option, the writer becomes obligated
during the term of the option, upon exercise of the option, to sell the
underlying securities to the purchaser against receipt of the exercise price.
The writer of a call option also loses the potential for gain on the
underlying securities in excess of the exercise price of the option during the
period that the option is open.
Conversely, the purchaser of a put option has the right, for a specified
period of time, to sell the securities subject to the option to the writer of
the put at the specified exercise price.
The writer of an exchange-traded option that wishes to terminate its
obligation may effect a "closing purchase transaction". This is accomplished
by buying an option of the same series as the option previously written.
(Options of the same series are options with respect to the same underlying
security, having the same expiration date and the same exercise price.)
Likewise, an investor who is the holder of an option may liquidate a position
by effecting a "closing sale transaction". This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected.
An exchange-traded option position may be closed out only where there exists a
secondary market for an option of the same series. For a number of reasons, a
secondary market may not exist for options held by the Fund, or trading in
such options might be limited or halted by the exchange on which the option is
trading, in which case it might not be possible to effect closing transactions
in particular options the Fund has purchased with the result that the Fund
would have to exercise the options in order to realize any profit. If the Fund
is unable to effect a closing purchase transaction in a secondary market in an
option the Fund has written, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on a which the option is listed which, in effect,
gives its guarantee to every exchange-traded option transaction. In contrast,
options traded on the over-the-counter market ("OTC options") are contracts
between the Fund and its contra-party with no clearing organization guarantee.
Thus, when the Fund purchases an OTC option, it relies on the dealer from
which it has purchased the OTC option to make or take delivery of the
securities underlying the option. Failure by the dealer to do so would result
in the loss of the premium paid by the Fund as well as the loss of the
expected benefit of the transaction. The Board of Directors will evaluate the
creditworthiness of any dealer from which the Fund proposes to purchase
options.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it
to the dealer who issued it. Similarly, when the Fund writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration
only by entering into a closing purchase transaction with the dealer to which
the Fund originally wrote the OTC option. While the Fund will enter into OTC
options only with dealers which agree to, and which are expected to be capable
of entering into closing transactions with the Fund, there can be no assurance
that the Fund will be able to liquidate an OTC option at a favorable price at
any time prior to expiration. Until the Fund is able to effect a closing
purchase transaction in a covered OTC call option the Fund has written, it
will not be able to liquidate securities used as cover until the option
expires or is
B-1
<PAGE>
exercised or different cover is substituted. In the event of insolvency of the
contra-party, the Fund may be unable to liquidate an OTC option. With respect
to options written by the Fund, the inability to enter into a closing purchase
transaction may result in material losses to the Fund. For example, since the
Fund must maintain a covered position with respect to any call option on a
security it writes, the Fund may be limited in its ability to sell the
underlying security while the option is outstanding. This may impair the
Fund's ability to sell a portfolio security at a time when such a sale might
be advantageous.
Currently, many options on equity securities are exchange-traded, whereas
options on debt securities are primarily traded on the over-the counter
market.
In considering the use of options to hedge the Fund's portfolio, particular
note should be taken of the following additional considerations:
(1) As described in this Prospectus, the Fund may, among other things,
purchase call options on debt securities it intends to acquire in order to
hedge against anticipated market appreciation in the price of the
underlying security. If the market price does increase as anticipated, the
Fund will benefit from that increase but only to the extent that the
increase exceeds the premium paid and related transaction costs. If the
anticipated rise does not occur or if it does not exceed the amount of the
premium and related transaction costs, the Fund will bear the expense of
the option without gaining an offsetting benefit. If the market price of
the debt securities should fall instead of rise, the benefit the Fund
obtains from purchasing the securities at a lower price will be reduced by
the amount of the premium paid for the call options and by transaction
costs.
(2) The Fund also may purchase put options on equity securities issued by
the issuer of debt securities held by the Fund in order to hedge against
declines in the debt securities attributable to the issuer's credit: or may
purchase put options on portfolio debt securities when it believes a
defensive posture is warranted. Protection is provided during the life of a
put option because the put gives the Fund the right to sell the underlying
security at the put exercise price, regardless of a decline in the
underlying security's market price below the exercise price. This right
limits the Fund's losses from the security's possible decline in value
below the exercise price of the option to the premium paid for the option
and related transaction costs. If the market price of the Fund's portfolio
should increase, however, the profit which the Fund might otherwise have
realized will be reduced by the amount of the premium paid for the put
option and by transaction costs.
(3) The value of an option position will reelect, among other things, the
current market price of the underlying security, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security and general market
conditions. For this reason, the successful use of options as a hedging
strategy depends upon the adviser's ability to forecast the direction of
price fluctuations in the underlying securities market.
(4) Options normally have expiration dates of up to nine months. The
exercise price of the options may be below, equal to or above the current
market values of the underlying securities at the time the options are
written. Options that expire unexercised have no value. Unless an Option
purchased by the Fund is exercised or unless a closing transaction is
effected with respect to that position, a loss will be realized in the
amount of the premium paid (and related transaction costs).
(5) The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs; however, the Fund
may also save on commissions and transaction costs by hedging through such
activities rather than buying or selling securities in anticipation of
market moves.
(6) A holder of a stock index option who exercises it before the closing
index value for that day is available runs the risk that the level of the
underlying index may subsequently change. For example, in the case of a
call, if such a change causes the closing index value to fall below the
exercise price of the option on that index, the exercising holder will be
required to pay the difference between the closing index value and the
exercise price of the option.
B-2
<PAGE>
SPECIAL CHARACTERISTICS OF FUTURES AND OPTIONS THEREON AND ASSOCIATED RISKS
The Fund may enter into futures contracts for the purchase or sale of certain
debt securities, aggregates of debt securities or indices of prices thereof
("interest rate futures contracts"), aggregates of equity securities or
indices of prices thereof ("stock index futures contracts"), and other
financial indices (collectively, "financial futures contracts") and options
thereon.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying
the contract at a specified price at a specified future time. "A purchase" of
a futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time. No price is paid upon entering
into a futures contract. Certain futures contracts are settled on a net cash
payment basis rather than by the sale and delivery of the securities
underlying the futures contracts. U.S. futures contracts and options thereon
have been designed by exchanges that have been designated as "contract
markets" by the CFTC and must be executed though a futures commission merchant
(i.e., a brokerage firm) which is a member of the relevant contract market.
Futures contracts and options thereon trade on these contract markets and the
exchange's affiliated clearing organization guarantees performance of the
contracts as between the clearing members of the exchange.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put) at a
specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume a short futures
position (if the option is a call) or a long futures position (if the option
is a put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin
account with respect to that option, which represents the amount by which the
market price of the futures contract at exercise exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
on the futures contract.
At the time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial margin"). It is expected
that the initial margin on U.S. exchanges may range from approximately 5% to
approximately 15% of the value of the securities or commodities underlying the
contract. Under certain circumstances, however, such as periods of high
volatility, the Fund may be required by an exchange to increase the level of
its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in cash of "variation margin" may be
required, a process known as "mark to the market". Each day the Fund is
required to provide or is entitled to receive variation margin in an amount
equal to any decline (in the case of a long futures position) or increase (in
the case of a short futures position) in the contract's value since the
preceding day.
Although futures contracts by their terms may call for the actual delivery or
acquisition of underlying securities, in most cases the contractual obligation
is extinguished by offset before the expiration of the contract without having
to make or take delivery of the securities. The offsetting of a contractual
obligation is accomplished by buying (to offset an earlier sale) or selling
(to offset an earlier purchase) an identical futures contract calling for
delivery in the same month. Such a transaction cancels the obligation to make
or take delivery of the underlying securities. The Fund will incur brokerage
fees and related transaction costs when it purchases or sells futures
contracts.
Futures contracts entail special risks. Among other things, the ordinary
spreads between values in the cash and futures markets due to differences in
the character of these markets, are subject to distortions relating to
investors' obligations to meet additional variation margin requirements:
decisions to make or take delivery, rather than entering into offsetting
transactions; and the difference between margin requirements in the securities
markets and margin deposit requirements in the futures market. The possibility
of such distortion means that a correct forecast of general interest rate
trends by the Adviser may still not result in a successful transaction.
B-3
<PAGE>
Although the Fund believes that use of such contracts will benefit the Fund,
if the Adviser's judgment about the general direction of interest rates is
incorrect the Fund's overall performance would be poorer than if it had not
entered into any such contracts. For example, if the Fund has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of debt securities held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value
of its assets which it has hedged because it will have offsetting losses in
its futures positions. In addition, particularly in such situations, if the
Fund has insufficient cash, it may have to sell assets from its portfolio to
meet daily variation margin requirements. Any such sale of assets may, but
will not necessarily, be at increased prices which reflect the rising market.
Consequently, the Fund may have to sell assets at a time when it may be
disadvantageous to do so.
The Fund's ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the development and
maintenance of a liquid market. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there appears
to be a liquid market, there is no assurance that a liquid market on an
exchange will exist for any particular futures contract or option thereon at
any particular time. Although futures contracts on indices of (investment
grade) corporate debt securities do currently exist, the markets in these
futures contracts are new and highly illiquid.
Under certain circumstances, futures exchanges may establish daily limits in
the amount that the price of a futures contract or related option contract may
vary either up or down from the previous day's settlement price. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures or options contract prices could move to the daily limit
for several consecutive trading days with little or no trading and thereby
prevent prompt liquidation of positions and subject some traders to
substantial losses.
Where it is not possible to effect a closing transaction in a contract or to
do so at a satisfactory price, the Fund would have to make or take delivery
under the futures contract, or, in the case of a purchased option, exercise
the option. In the case of a futures contract which the Fund has sold and is
unable to close out, the Fund would be required to maintain margin deposits on
the futures contract and to make arbitration margin payments until the
contract is closed.
B-4
