<PAGE>
PROSPECTUS
Morgan Stanley Dean Witter High Yield Fund, Inc.
(formerly The Morgan Stanley High Yield Fund, Inc.)
----------------
2,960,000 Shares of Common Stock
Issuable Upon Exercise of
Rights to Subscribe for Such Shares
----------------
Morgan Stanley Dean Witter High Yield Fund, Inc. is issuing non-
transferable rights to its stockholders. You will receive one right for each
share of common stock you own on the record date, which is August 23, 1999.
These rights entitle you to subscribe for shares of the Fund's common stock.
You may purchase one new share of common stock for every three rights you
receive. Record date stockholders who receive less than three rights will be
entitled to purchase one share. Record date stockholders who exercise all
their rights may purchase the shares not acquired by other record date
stockholders in this rights offering, subject to the limitations as discussed
in this Prospectus. The Fund may increase the number of shares that may be
subscribed for in this offer by up to 25% of the primary subscription (as
defined in this Prospectus) or an additional 740,000 shares, to honor record
date stockholder requests to purchase more shares.
The rights are non-transferable and, therefore, may not be purchased or
sold. The rights will not be admitted for trading on the New York Stock
Exchange or any other securities exchange. The Fund's shares of common stock
are listed and the shares issued in this offer will be listed on the New York
Stock Exchange under the symbol "MSY," subject to notice of issuance. On
August 20, 1999, the last reported net asset value per share of the Fund's
common stock was $13.03 and the last reported sales price of a share on the
New York Stock Exchange was $13.88.
The subscription price per share will be 95% of the average of the last
reported sales price per share of the Fund's common stock on the New York
Stock Exchange for the five trading days ending with the expiration date. You
will not know the actual subscription price per share at the time of exercise.
You therefore will be required initially to pay for the shares at the
estimated subscription price of $13.25 per share (based on approximately 95%
of the last reported sales price on August 20, 1999). This offer will expire
at 5:00 P.M., New York City time, on September 24, 1999 unless the Fund
extends the offering as described in this Prospectus.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Estimated Subscription Price.......................... $13.25 $39,220,000
Sales Load............................................ $ 0.23 $ 686,350
Proceeds to Fund*..................................... $13.02 $38,533,650
</TABLE>
-----------
The proceeds to the Fund assumes all 2,960,000 shares are purchased at this
estimated subscription price. If the Fund increases the number of shares
subject to subscription by up to 740,000 shares, as described above, the
proceeds to the Fund would be $48,167,062.
* Before deduction of expenses incurred by the Fund related to the offering
estimated at $360,000.
----------------
The Fund is a non-diversified, closed-end management investment company.
The Fund seeks a high level of current income as its primary investment
objective and capital appreciation as a secondary objective. In seeking to
achieve these objectives, the Fund invests primarily in a portfolio of high
yield securities. There can be no assurance that the Fund will achieve its
investment objectives. Morgan Stanley Dean Witter Investment Management Inc.
(formerly Morgan Stanley Asset Management Inc.) has served as the Fund's
investment manager since the Fund's inception in 1993.
The Fund's investments in high yield, high risk securities and its
leveraged capital structure involve special risks. See the "Risk Factors and
Special Considerations" section on page 22 of this Prospectus for a more
comprehensive discussion of risks.
Stockholders who do not exercise their rights should expect that they
will, at the completion of this offer, own a smaller proportional interest in
the Fund than would otherwise be the case. Also, stockholders should note that
because the subscription price per share may be less than the net asset value
per share on the expiration date and because the Fund will incur expenses
related to the offering, record date stockholders may experience an immediate
dilution, which could be substantial, of the aggregate net asset value of
their shares of common stock as a result of this offer. The Fund cannot state
precisely the extent of this dilution at this time because the Fund does not
know what the net asset value per share will be at the expiration of this
offer, or what the subscription price will be, or what proportion of the
shares will be subscribed.
This Prospectus sets forth concisely the information about the Fund that
a prospective investor ought to know before investing. Investors are advised
to read and retain it for future reference.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
The date of this Prospectus is August 23, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY.......................................................... 3
FEE TABLE................................................................... 10
FINANCIAL HIGHLIGHTS........................................................ 11
CAPITALIZATION AT JUNE 30, 1999............................................. 12
TRADING AND NET ASSET VALUE INFORMATION..................................... 12
THE FUND.................................................................... 13
THE OFFER................................................................... 13
USE OF PROCEEDS............................................................. 22
RISK FACTORS AND SPECIAL CONSIDERATIONS..................................... 22
INVESTMENT OBJECTIVES AND POLICIES.......................................... 28
INVESTMENT RESTRICTIONS..................................................... 35
MANAGEMENT OF THE FUND...................................................... 36
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 43
NET ASSET VALUE............................................................. 44
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN...................................... 45
TAXATION.................................................................... 46
DESCRIPTION OF CAPITAL STOCK................................................ 51
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR......................... 55
CUSTODIANS.................................................................. 55
EXPERTS..................................................................... 56
LEGAL MATTERS............................................................... 56
ADDITIONAL INFORMATION...................................................... 56
APPENDIX A.................................................................. A-1
APPENDIX B.................................................................. B-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand the
offer fully, you should read the entire Prospectus carefully, including the
risk factors.
Purpose of the Offer The Board of Directors of the Fund has
determined that it would be in the best
interests of the Fund and its stockholders to
increase the assets of the Fund so the Fund
may be in a better position to take advantage
of investment opportunities. The Fund's
investment manager believes, as a result of
recent events in the financial markets, that
there are a number of attractive investment
opportunities in the high-yield, high risk
bond market.
The Board also believes that the Fund's
expense ratio may be reduced as a result of
this offer. This is because the Fund's fixed
costs can be spread over a larger asset base.
The issuance of additional shares also may
enhance the liquidity of the Fund's shares on
the New York Stock Exchange.
The Board also considered that this rights
offering would give record date stockholders
the opportunity to purchase shares at a price
below market price and/or net asset value,
and might increase the level of market
interest in the Fund. The Board considered
the proposed terms of the offer, the expenses
of the offer, and its dilutive effect on
exercising and non-exercising record date
stockholders.
The Board of Directors has considered the
impact of the offer on its ability to
maintain, subject to market conditions, the
Fund's current level of distributions. Based
on current market conditions and available
leverage opportunities, the Board believes
that the offer will not result in a change in
the Fund's current level of dividends for the
foreseeable future.
Important Terms of the
Offer
Aggregate number of shares 2,960,000 (not including up to 740,000
offered additional shares the Fund may issue to cover
over-subscription requests).
Number of non-transferable One right for each whole share owned on the
rights issued to each record date.
stockholder
Subscription ratio One share for every three rights (1-for-3)
Estimated Subscription $13.25
Price Per Share
Subscription Price per 95% of the average of the last reported sales
share price per share of the Fund's common stock on
the New York Stock Exchange for the five
trading days ending with the expiration date.
Important Dates to
Remember
<TABLE>
<CAPTION>
Event Date
--------------------------------- --------------------
<S> <C>
Record Date...................... August 23, 1999
Subscription Period.............. August 23, 1999 to
September 24, 1999 *
Expiration Date.................. September 24, 1999 *
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Subscription Certificates and
Payment for Shares Due +......... September 24, 1999 *
Notice of Guaranteed Delivery
Due +............................ September 24, 1999 *
Payments and Subscription
Certificates for Guarantees of
Delivery Due..................... September 29, 1999 *
Confirmation Mailed to
Participants..................... October 6, 1999 *
</TABLE>
----------
* Unless the offer is extended.
+ A stockholder exercising rights must deliver
either (i) a subscription certificate and payment
for shares or (ii) a notice of guaranteed
delivery by September 24, 1999, unless the offer
is extended.
The first regular monthly 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 the shares. It is the Fund's
present policy to pay dividends on the 15/th/
day of each month to stockholders of record
on the last day of the previous month.
Assuming the subscription period is not
extended, it is expected that the first
dividend received by stockholders acquiring
shares in the offer will be paid on the 15/th/
day of November, 1999.
Over-Subscription Record date stockholders who fully exercise
Privilege all of the rights issued to them are entitled
to subscribe for those shares that were not
subscribed for by other record date
stockholders. If these requests for shares
exceed the shares available, the Fund may
determine after the expiration of the offer,
in the discretion of the Board of Directors,
to issue up to an additional 25% of the
shares available pursuant to the offer (up to
an additional 740,000 shares), in order to
cover these requests. Regardless of whether
the Fund issues such additional shares, to
the extent shares are not available to honor
all requests, the available shares will be
allocated pro rata among those record date
stockholders who over-subscribe based on the
number of rights originally issued to them by
the Fund.
Method for Exercising If you wish to exercise your rights, you may
Rights do so in the following ways:
(1) Complete and sign the subscription
certificate. Mail it in the envelope provided
or deliver the completed and signed
subscription certificate with payment in full
to American Stock Transfer & Trust Company at
the address indicated on the subscription
certificate. Your completed and signed
subscription certificate and payment must be
received by 5:00 P.M., New York City time, on
September 24, 1999, unless the offer is
extended.
(2) Contact your broker, banker 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 the third business day after the
expiration date of the offer. A fee may be
charged for this service. The notice of
guaranteed delivery
4
<PAGE>
must be received by 5:00 P.M., New York City
time, on the expiration date of the offer.
Fractional shares will not be issued. After
the exercise of rights, record date
stockholders who have remaining less than
three rights will not be able to exercise
those rights and purchase a share. Rather,
those rights will expire without any residual
value. Record date stockholders who receive
less than three rights, however, may purchase
one share at the subscription price. Record
date stockholders may request additional
shares under the over-subscription privilege.
Non-Transferability of The rights are non-transferable and,
Rights therefore, may not be purchased or sold. The
rights will not be listed for trading on the
New York Stock Exchange or any other
securities exchange. However, the shares to
be issued pursuant to the offer will be
listed for trading on the New York Stock
Exchange, subject to notice of issuance.
Offering Fees and Expenses The Fund has agreed to pay broker-dealers
that have executed and delivered a soliciting
dealer agreement and have solicited the
exercise of rights, solicitation fees equal
to 1.75% of the subscription price per share
for each share issued pursuant to the
exercise of rights as a result of their
soliciting efforts. Other offering expenses
incurred by the Fund are estimated at
$360,000.
Foreign Restrictions
Subscription certificates will not be mailed
to record date stockholders whose record
addresses are outside the United States.
Foreign record date stockholders will receive
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 stockholders'
accounts until instructions are received to
exercise the rights. Upon request, the
subscription agent will send a copy of the
Prospectus to such foreign record date
stockholders. If no instructions have been
received by the expiration date, the rights
of those foreign record date stockholders
will expire.
Use of Proceeds The estimated net proceeds of the offer are
approximately $38,173,650. This figure is
based on the estimated subscription price of
$13.25 per share and assumes all 2,960,000
shares offered in the primary subscription
are sold and that offering expenses estimated
at approximately $360,000 are paid. If, as
described above, the Fund increases the
number of shares subject to subscription by
25% in order to satisfy over-subscription
requests, the additional net proceeds will be
approximately $9,633,412 (for total estimated
net proceeds of approximately $47,807,062).
The Fund's investment manager anticipates
that the Fund will take up to 30 days (but in
no event longer than six months) to invest or
employ these proceeds in accordance with the
Fund's investment objectives and policies
under current market conditions. The proceeds
of the offer will be held in U.S. Government
securities and other high-quality, short-term
money market instruments until they are
invested. While the proceeds are invested in
U.S. Government securities and other high-
quality, short-term money market instruments,
the proceeds will not be invested in
securities consistent with the Fund's primary
objective of high current income.
5
<PAGE>
Information Agent Please direct all questions or inquiries
relating to the offer to the Fund's
information agent as follows:
Shareholder Communications Corporation
17 State Street
New York, NY 10005
Stockholders may call toll free:
(800) 603-1720
In addition, Banks and Brokers may call:
(212) 805-7113
Stockholders may also contact their brokers
or nominees for information with respect to
the offer.
The Fund The Fund is a non-diversified, closed-end
management investment company designed for
investors desiring to invest a portion of
their assets in high yield securities.
Investment Objectives and The Fund's primary investment objective is to
Policies seek a high level of current income. As a
secondary objective, the Fund seeks capital
appreciation. Under normal market conditions,
at least 65% of the Fund's total assets will
be invested in high yield securities issued
by U.S. corporations. In addition, the Fund
may invest up to 35% of its total assets in
high yield securities issued by non-U.S.
corporations and by government and
government-related issuers located in
developing countries, provided that no more
than 20% of the Fund's total assets may be
invested in high yield securities issued by
government or government-related issuers in
developing countries.
The high yield securities in which the Fund
will invest include debt obligations (e.g.,
bonds, debentures, notes, equipment lease
certificates, equipment trust certificates,
conditional sales contracts and commercial
paper) and preferred stock. Such securities
generally will be rated, at the time of
investment, below investment grade (that is,
rated "Ba" or lower by Moody's Investors
Service, Inc. or "BB" or lower by Standard &
Poor's Ratings Group) or, if not rated,
determined by the investment manager to be of
comparable quality. There is no minimum
rating requirement for the securities in
which the Fund invests. However, the Fund
anticipates that under normal market
conditions, no more than 25% of the Fund's
total assets will be rated, at the time of
investment, below "B" by Moody's or S&P, or
will be unrated and of comparable quality.
Yields on these securities generally, at the
time of investment exceed yields on higher-
rated securities. A description of the
ratings used by Moody's and S&P is set forth
in Appendix A to this Prospectus.
The Fund is authorized to borrow or issue
shares of preferred stock or short-term debt
securities in an amount up to 33 1/3% of the
Fund's total assets (including the amount
obtained from leverage) for investment
purposes to increase the opportunity for
greater returns. Leverage involves additional
risks as discussed on pages 8 and 25 of this
Prospectus.
Investment Manager
Morgan Stanley Dean Witter Investment
Management Inc. (formerly Morgan Stanley
Asset Management Inc.), a wholly owned
subsidiary of Morgan Stanley Dean Witter &
Co., has served as investment manager to the
Fund since its inception pursuant to an
investment advisory and management agreement
with the Fund. As of June 30,
6
<PAGE>
1999, the investment manager and its
institutional investment management
affiliates had approximately $175.3 billion
of combined assets under management
(including assets under fiduciary advisory
control), of which approximately $3.5 billion
was invested in high yield securities. The
investment manager is a registered investment
advisor under the U.S. Investment Advisers
Act of 1940.
The Fund pays the investment manager a fee,
computed weekly and payable monthly, at the
annual rate of 0.70% of the Fund's average
weekly net assets. The Fund's investment
manager will benefit from an increase in the
Fund's assets resulting from the offer.
Risk Factors and
Special Considerations The following summarizes some of the matters
that you should consider before investing in
the Fund in connection with this offer.
Dilution. Stockholders who do not fully
exercise their rights in the primary
subscription should expect that they will, at
the completion of the offer, own a smaller
proportional interest in the Fund than would
otherwise be the case. Furthermore, the
subscription price per share for the offer
may be lower than the Fund's net asset value
per share. Any rights offering priced at a
discount to the Fund's net asset value per
share and involving payment of expenses by
the Fund entails some dilution in net asset
value. The offer may result in a dilution of
net asset value for all stockholders, which
will disproportionately affect stockholders
who do not exercise their rights. In
addition, there also may be substantial
dilution in net asset value and share
ownership, and therefore voting power, to the
extent that the Fund increases the number of
shares subject to subscription by up to 25%
in order to satisfy over-subscription
requests. The Fund cannot state precisely the
extent of this dilution at this time because
the Fund does not know what the net asset
value per share will be at the expiration of
the offer or what the subscription price will
be or what proportion of the shares will be
subscribed.
High Yield, High Risk Investments. At any one
time, a substantial portion of the Fund's
assets will be invested in securities that
are rated below investment grade as
determined by recognized rating services,
such as Moody's and S&P, or if unrated, of
comparable quality, as determined by the
investment manager. Debt or fixed income
securities rated below investment grade
(e.g., rated "Ba" or lower by Moody's or "BB"
or lower by S&P) are commonly referred to as
"junk bonds" and are considered to be
speculative. Investment in securities rated
below investment grade typically involves
risks not associated with higher rated
securities, including overall greater risk of
timely and ultimate payment of interest and
principal, potentially greater sensitivity to
general economic conditions and changes in
interest rates, greater market price
volatility and limited secondary market
trading. Certain of the Fund's investments
may be considered to have extremely poor
prospects of ever attaining any real
investment standing, to have a current
identifiable vulnerability to default and to
be unlikely to have the capacity to pay
interest and repay principal when due in the
event of adverse business, financial or
economic conditions, or may be in default or
not current in the payment of interest or
principal. In addition, the secondary market
for high yield
7
<PAGE>
securities, may not be as liquid as the
secondary market for more highly rated
securities because it is concentrated in
relatively few market makers.
Considerations relating to Investments in
Non-U.S. Issuers. Investing in securities of
non-U.S. issuers involves certain
considerations not typically associated with
investing in the securities of U.S. issuers.
For example, investments may be restricted or
controlled to varying degrees. Governmental
approval may be required for the repatriation
of investment income, capital or the proceeds
of sales of securities of non-U.S. issuers.
No established secondary markets may exist
for many of the non-U.S. high yield
securities in which the Fund will invest. In
addition, non-U.S. issuers are not generally
subject to accounting, auditing and financial
reporting standards, practices and disclosure
requirements comparable to those applicable
to U.S. issuers. In addition, laws in foreign
countries governing business organizations,
bankruptcy and insolvency may provide less
protection to security holders such as the
Fund than that provided by U.S. laws. The
economies of foreign countries may differ
favorably or unfavorably from the U.S.
economy in such respects as growth of gross
domestic product, rate of inflation, currency
depreciation, capital reinvestment, resource
self-sufficiency and balance of payments
position. Certain developing countries have
historically experienced, and may continue to
experience, high rates of inflation, high
interest rates, exchange rate fluctuations,
large amounts of external debt, balance of
payments and trade difficulties and extreme
poverty and unemployment. Also, there is a
possibility of nationalization, expropriation
or confiscatory taxation, political changes,
government regulation, social instability or
diplomatic developments (including war) which
could affect adversely the economies of such
countries or the value of the Fund's
investments in those countries. With respect
to the Fund's investments in developing
country government debt securities, the
issuer or governmental authority that
controls the repayment of a developing
country's debt may not be able or willing to
repay the principal or interest when due in
accordance with the terms of such debt.
Foreign Currency Considerations. Since the
Fund may invest in securities denominated or
quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange
rates could affect the value of securities in
the Fund's portfolio and the unrealized
appreciation or depreciation of investments.
Furthermore, the Fund may incur costs in
connection with conversions between various
currencies. To the extent available, the Fund
may seek to protect the value of some portion
or all of its non-U.S. dollar-denominated
portfolio holdings against currency risks by
engaging in hedging transactions as set forth
in this Prospectus.
Risk of Leverage. The Fund's use of leverage
poses certain risks for holders of common
stock, including the possibility of higher
volatility of both the net asset value and
market value of the common stock and the risk
that fluctuations in interest rates on
borrowings or in the dividend rates on any
preferred stock may affect the yield to
holders of common stock. There can be no
assurance that the Fund will be
8
<PAGE>
able to realize a higher return on its
investment portfolio through the use of
leverage.
Discount from Net Asset Value. Shares of
closed-end funds frequently trade at a market
price that is less than the value of the net
assets attributable to those shares. The
Fund's shares have traded in the market
above, at, and below net asset value since
the commencement of the Fund's operations.
Since March 1999, the Fund's shares have
consistently traded above net asset value.
Dividends and Distributions. Based on
information provided by Fund's investment
manager on current market conditions in the
high yield bond market, the Board of
Directors believes that the offer will not
result in a change in the Fund's current
level of dividends per share for the
foreseeable future. However, there can be no
assurance that the Fund will be able to
maintain its current level of dividends per
share, and the Board of Directors may, in its
sole discretion, change the Fund's current
dividend policy or its current level of
dividend per share in response to market or
other conditions.
Year 2000. The investment advisory services
provided to the Fund by the investment
manager depend on the smooth operation of its
computer systems. Many computer and software
systems in use today cannot recognize the
year 2000, but revert to 1900 or some other
date, due to the manner in which dates were
encoded and calculated. That failure could
have a negative impact on the handling of
securities trades, pricing and account
services. The investment manager has been
actively working on necessary changes to its
own computer systems to deal with the year
2000 problem and expects that its systems
will be adapted before that date. There can
be no assurance, however, that the investment
manager will be successful. In addition,
other unaffiliated service providers may be
faced with similar problems. The investment
manager is monitoring their remedial efforts,
but there can be no assurance that they and
the services they provide will not be
adversely affected.
In addition, it is possible that the markets
for securities in which the Fund invests may
be detrimentally affected by computer
failures throughout the financial services
industry beginning January 1, 2000.
Improperly functioning trading systems may
result in settlement problems and liquidity
issues. In addition, corporate and
governmental data processing errors may
result in production problems for individual
companies and overall economic uncertainties.
Earnings of individual issuers will be
affected by remediation costs, which may be
substantial and may be reported
inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's
investments may be adversely affected.
You should carefully consider your ability to
assume the foregoing risks before making an
investment in the Fund. An investment in
shares of the Fund is not appropriate for all
investors.
9
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
Stockholder Transaction Expenses:
Sales Load (as a percentage of offering price)(1)........................ 1.75%
Annual Expenses (as a percentage of net assets):
Management Fees.......................................................... 0.70%
Interest Payments on Borrowed Funds(2)................................... 1.62%
Other Expenses(2)........................................................ 0.33%
Total Annual Expenses.................................................... 2.65%
</TABLE>
(1) The Fund has agreed to pay broker-dealers who have executed and
delivered a soliciting dealer agreement and have solicited the exercise
of rights, solicitation fees equal to 1.75% of the subscription price
per share for each share issued pursuant to the exercise of rights as a
result of their soliciting efforts.
(2) Amounts are based on estimated amounts for the Fund's current fiscal
year after giving effect to the anticipated net proceeds of the offer,
assuming that all of the rights are exercised.
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 indicated..... $ 44 $ 98 $ 156 $ 311
</TABLE>
The foregoing 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.
The Example set forth above assumes payment by an investor of the 1.75%
sales load, reinvestment of all dividends and distributions at net asset value
and an annual expense ratio of 2.65%. The tables above and the assumption in
the Example of a 5% annual return are required by Securities and Exchange
Commission regulations applicable to all investment companies. The Example
should not be considered as a representation of past or future expenses or
annual rates of return. Actual expenses or annual rates of return may be more
or less than those assumed for purposes of the Example. In addition, while the
Example assumes reinvestment of all dividends and distributions at net asset
value, participants in the Fund's Dividend Reinvestment and Cash Purchase Plan
may receive shares purchased or issued at a price or value different from net
asset value. See "Dividends and Distributions; Dividend Reinvestment and Cash
Purchase Plan."
10
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share of common stock of the Fund outstanding throughout each period)
The table below sets forth certain specified information for a
share of common stock of the Fund outstanding throughout each period
presented. The financial highlights for each of the five years ended
December 31, 1998 have been audited by PricewaterhouseCoopers LLP, the
Fund's independent accountants, whose report thereon was unqualified.
The information should be read in conjunction with the financial
statements and notes thereto, which are incorporated herein by
reference, in the Fund's Annual Report as of December 31, 1998 and the
Fund's Semi-Annual Report (unaudited) as of June 30, 1999, which are
available without charge by contacting the Fund's dividend paying agent,
transfer agent and registrar, American Stock Transfer & Trust Company,
40 Wall Street, New York, New York 10005, toll free (800) 937-5449.
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1999 Year Ended December 31, Nov. 30, 1993*
SELECTED PER SHARE DATA ----------- ------------------------------------------------ to
AND RATIOS: (Unaudited) 1998 1997 1996 1995 1994 Dec. 31, 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 13.62 $ 15.19 $ 14.45 $ 13.63 $ 11.96 $ 14.10 $ 14.10
- --------------------------------------------------------------------------------------------------------
Offering Costs.......... -- -- -- -- -- (0.01) (0.05)
- --------------------------------------------------------------------------------------------------------
Net Investment Income... 0.65 1.34 1.37 1.35 1.34 1.32 0.04
Net Realized and
Unrealized Gain (Loss)
on Investments.......... (0.21) (0.66) 1.21 0.89 1.60 (2.08) 0.01
- --------------------------------------------------------------------------------------------------------
Total from Investment
Operations............ 0.44 0.68 2.58 2.24 2.94 (0.76) 0.05
- --------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income... (0.69) (1.40) (1.36) (1.42) (1.27) (1.36) --
In Excess of Net
Investment Income....... -- (0.02) -- -- -- (0.01) --
Net Realized Gain....... -- (0.76) (0.48) -- -- -- --
In Excess of net
Realized Gain.......... -- (0.07) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions.... (0.69) (2.25) (1.84) (1.42) (1.27) (1.37) --
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period.................. $ 13.37 $ 13.62 $ 15.19 $ 14.45 $ 13.63 $ 11.96 $ 14.10
- --------------------------------------------------------------------------------------------------------
Per Share Market Value,
End of Period........... $ 15.75 $ 15.38 $ 16.06 $ 14.63 $ 12.88 $ 11.38 $ 14.75
- --------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value........... 7.33% 11.15% 23.79% 25.92% 25.21% (14.11)% 4.61%
Net Asset Value (1).... 2.85% 4.12% 18.48% 17.52% 26.07% (5.53)% 0.00%
- --------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL
DATA:
- --------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (Thousands)...... $118,220 $119,940 $133,050 $126,330 $118,863 $104,260 $122,781
- --------------------------------------------------------------------------------------------------------
Ratio of Expenses Before
Interest Expense to
Average Net Assets...... 1.10% 1.10% 1.06% 1.12% 1.11% 1.12% 1.46%**
Ratio of Expenses After
Interest Expense to
Average Net Assets...... 2.72% 2.23% 2.76% 2.46% 2.79% 2.78% 1.46%**
Ratio of Net Investment
Income to Average Net
Assets.................. 9.61% 9.00% 8.98% 9.82% 10.29% 10.18% 3.76%**
Portfolio Turnover
Rate.................... 26% 78% 94% 136% 84% 32% 0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
* Commencement of operations.
** Annualized.
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
11
<PAGE>
CAPITALIZATION AT JUNE 30, 1999
<TABLE>
<CAPTION>
Amount Outstanding
Exclusive of Amount Held
Amount Held by the by the Fund
Fund or for its or for
Title of Class Amount Authorized Account its Account
-------------- ------------------ ------------------ ------------
<S> <C> <C> <C>
Common Stock, $0.01 par value 100,000,000 shares 8,841,981 shares - 0 - shares
</TABLE>
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded both at a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above 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 Fund's
common stock on the New York Stock Exchange Composite Tape, quarterly trading
volume on the Exchange, the high and low net asset value per share and the
high and low premium or discount at which the Fund's shares were trading for
each fiscal quarter during the two most recent fiscal years and since the
beginning of the current fiscal year.
<TABLE>
<CAPTION>
Quarterly
Trading Premium (Discount)
Market Price Volume Net Asset Value to Net Asset Value(%)
--------------- (Hundreds --------------- ----------------------
Quarter Ended High Low of Shares) High Low High Low
- ------------- ------- ------- ---------- --------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1997.......... 15.1250 14.2500 14,601 15.04 14.34 3.59 (0.70)
June 30, 1997........... 15.3750 13.7500 11,595 15.32 14.10 1.71 (2.85)
September 30, 1997...... 15.9375 15.0625 9,764 15.80 15.28 0.79 (1.04)
December 31, 1997....... 16.3125 15.0625 10,490 15.96 15.56 3.17 (3.42)
March 31, 1998.......... 16.6250 15.8125 8,397 15.64 15.23 5.91 2.63
June 30, 1998........... 16.3750 15.0625 8,520 15.74 15.24 4.43 (1.59)
September 30, 1998...... 15.6875 12.1875 12,577 15.42 13.59 2.19 (11.48)
December 31, 1998....... 16.0625 12.5625 11,901 14.67 13.36 9.76 (5.03)
March 31, 1999.......... 15.7500 14.9375 10,780 13.85 13.49 13.64 10.29
June 30, 1999........... 15.8125 15.5000 7,822 14.19 13.36 17.57 10.45
</TABLE>
The net asset value per share of the Fund's common stock at the close of
business on July 9, 1999 (the last trading date on which the Fund publicly
reported its net asset value prior to the announcement of the offer) and on
August 20, 1999 (the last trading date on which the Fund publicly reported its
net asset value prior to the date of this Prospectus) was $13.47 and $13.03,
respectively, and the last reported sales price of a share of the Fund's
common stock on the New York Stock Exchange on those dates was $15.75 and
$13.88, respectively.
12
<PAGE>
THE FUND
Morgan Stanley Dean Witter High Yield Fund, Inc. (the "Fund"),
incorporated in Maryland on September 23, 1993 under the name The Morgan
Stanley High Yield Fund, Inc., is a non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund seeks a high level of current income as its
primary investment objective and capital appreciation as a secondary
objective. In seeking to achieve these objectives, the Fund invests primarily
in a portfolio of high yield securities. No assurance can be given that the
Fund's investment objectives will be realized. Due to the risks inherent in
high yield securities generally, the Fund should be considered as a vehicle
for investing a portion of an investor's assets in the high yield securities
markets and not as a complete investment program. The stockholders of the Fund
approved the change in the Fund's name to Morgan Stanley Dean Witter High
Yield Fund, Inc. at the Annual Meeting of stockholders on June 21, 1999.
At all times, except during periods when a temporary defensive
investment strategy is appropriate, as determined by the Fund's Investment
Manager (as defined below under "Investment Manager") the Fund will invest at
least 65% of its total assets in high yield securities issued by U.S.
corporations. In addition, the Fund may invest up to 35% of its total assets
in high yield securities issued by non-U.S. corporations and by government and
government-related issuers located in developing countries, provided that no
more than 20% of the Fund's total assets may be invested in high yield
securities issued by government or government-related issuers in developing
countries. The high yield securities in which the Fund invests include debt
obligations and preferred stock. Such securities generally will be rated, at
the time of investment, below investment grade (that is, rated "Ba" or lower
by Moody's Investors Service, Inc. ("Moody's") or "BB" or lower by Standard &
Poor's ("S&P") or, if not rated, determined by the Investment Manager to be of
comparable quality. There is no minimum rating requirement for the securities
in which the Fund invests. However, the Fund anticipates that under normal
market conditions no more than 25% of the Fund's total assets will be rated,
at the time of investment, below "B" by Moody's or S&P, or will be unrated and
of comparable quality. Yields on these securities will, generally, at the time
of investment exceed yields on higher-rated securities. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The Fund commenced operations on November 30, 1993 following the
issuance of 7,093 shares of common stock of the Fund, par value $0.01 per
share ("Common Stock") to the Investment Manager on November 17, 1993, for
$100,000 and the initial public offering and over-allotment on November 23,
1993 and December 23, 1993 of 8,700,356 shares to the public resulting in
aggregate net proceeds to the Fund of approximately $122,220,020. At August
20, 1999, the Fund had 8,848,421 shares of Common Stock outstanding, which are
listed and traded on the New York Stock Exchange ("NYSE") under the symbol
"MSY". As of August 20, 1999, the net assets of the Fund were $115,277,198.
THE OFFER
Purpose of the Offer
The Board of Directors of the Fund has determined that it would be in
the best interests of the Fund and its stockholders to increase the assets of
the Fund available for investment so that the Fund will be in a better
position to take advantage of available investment opportunities. The
Investment Manager believes, as a result of recent events in the financial
markets, that there are a number of attractive investment opportunities in the
high-yield, high risk bond market.
In addition, the Board of Directors believes that increasing the size of
the Fund may lower the Fund's expenses as a proportion of average net assets
because the Fund's fixed costs can be spread over a
13
<PAGE>
larger asset base. In addition, the issuance of additional shares may enhance
the liquidity of the Fund's shares on the NYSE.
The Board also considered that this rights offering would give record
date stockholders the opportunity to purchase shares at a price below market
price and/or net asset value ("NAV") and might increase the level of market
interest in the Fund.
The Board of Directors considered the impact of the offer on its ability
to maintain, subject to market conditions, the Fund's current level of
distributions. Based on information provided by the Investment Manager on
current market conditions in the bond markets and available leverage
opportunities, the Board of Directors believes the offer will not result in a
change in the Fund's current level of dividends per share for the foreseeable
future. There can be no assurance the Fund will maintain its current level of
dividends per share. The Board of Directors may, in its sole discretion,
change the Fund's level of dividends per share at any time. For a further
discussion of the anticipated impact of the offer of the Fund's dividends,
please refer to "Risk Factors and Special Considerations -- Dividends and
Distributions."
In determining that the offer was in the best interests of the Fund and
its stockholders, the Board of Directors considered, among other things, using
a fixed price or a price based on a percentage of the Fund's NAV or market
price at the expiration of the offer (variable pricing), the benefits and
drawbacks of conducting a non-transferable versus a transferable rights
offering and the effect on the Fund if the offer is undersubscribed.
The Investment Manager will benefit from the offer because the
Investment Manager's fee is based on the average weekly net assets of the
Fund.
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 the 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 stockholders of record ("Record Date
Stockholders"), as of the close of business on August 23, 1999 (the "Record
Date"), non-transferable rights ("Rights") entitling the holders thereof to
subscribe for an aggregate of 2,960,000 shares (the "Shares") of the Fund's
Common Stock (the "Offer"). Each such Record Date Stockholder is being issued
one Right for each whole share of Common Stock owned on the Record Date. Only
Record Date Stockholders will be issued Rights and will be entitled to
participate in the Offer. The Rights entitle the holders thereof to subscribe
for one Share for every three Rights held (1-for-3) (the "Primary
Subscription"). Record Date Stockholders issued fewer than three Rights are
entitled to subscribe for one Share pursuant to the Primary Subscription.
Record Date Stockholders purchasing Shares in the Primary Subscription and
Record Date Stockholders who purchase Shares pursuant to the Over-Subscription
Privilege (as defined below) are hereinafter referred to as "Exercising Rights
Holders."
Rights may be exercised at any time during the subscription period (the
"Subscription Period"), which commences on August 23, 1999 and ends at 5:00
P.M., New York City time, on September 24, 1999 unless extended by the Fund
(the "Expiration Date"). The Rights are evidenced by Subscription Certificates
("Subscription Certificates") that will be mailed to Record Date Stockholders,
except as discussed below under "Foreign Stockholders."
Shares not subscribed for in the Primary Subscription will be offered,
by means of the over-subscription privilege (the "Over-Subscription
Privilege"), to those Record Date Stockholders who have exercised all Rights
issued to 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-
14
<PAGE>
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 stockholder may acquire pursuant to the Offer, stockholders
whose shares are held of record by Cede & Co. ("Cede"), as nominee for The
Depository Trust Company ("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.
The first regular monthly 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 the Shares. It is the Fund's present policy
to pay dividends on the 15/th/ day of each month to stockholders of record on
the last day of the previous month. Assuming the Subscription Period is not
extended, it is expected that the first dividend received by stockholders
acquiring Shares in the Offer will be paid on the 15/th/ day of November, 1999.
Fractional Shares will not be issued. After the exercise of Rights,
Record Date Stockholders who have remaining less than three Rights will not be
able to exercise those rights and purchase a share. Rather, those rights will
expire without any residual value. Record Date Stockholders who receive less
than three Rights, however, may purchase one share at the Subscription Price.
Record Date Stockholders may request additional Shares under the Over-
Subscription Privilege.
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
Over-Subscription Privilege
Shares not subscribed for by Record Date Stockholders (the "Excess
Shares") will be offered, by means of the Over-Subscription Privilege, to
Record Date Stockholders who have exercised all exercisable Rights issued to
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 issued to them are exercisable. If
sufficient shares remain after completion of the Primary Subscription, all
over-subscription requests will be honored in full. If sufficient shares are
not available after completion of the Primary Subscription to honor all over-
subscription requests, the Fund may determine after the expiration of the
Offer, in the discretion of the Board of Directors, to issue up to an
additional 25% of the shares available pursuant to the Offer (up to an
additional 740,000 shares) in order to cover the over-subscription requests.
Regardless of whether the Fund issues such additional shares, and to the
extent Shares are not available to honor all over-subscription requests, the
available Shares will be allocated among those who over-subscribe so that the
number of shares issued to participating Record Date Stockholders will
generally be in proportion to the number of shares owned by such stockholders
on the record date. The allocation process involves a series of allocations in
order to assure that the total number of shares available for over-
subscription is distributed on a pro rata basis. Record Date Stockholders
should indicate, on the Subscription Certificate which they submit with
respect to the exercise of the Rights issued to them, how many Excess Shares
they are willing to acquire pursuant to the Over-Subscription Privilege.
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined herein), before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to
the Primary Subscription and the number of Shares subscribed for pursuant to
the Over-Subscription Privilege by such beneficial owner and that such
beneficial owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certification Forms will be
distributed to banks, brokers, trustees and other nominee holders with the
Subscription Certificates.
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.
15
<PAGE>
Subscription Price
The subscription price for the Shares to be issued pursuant to the Offer
will be 95% of the average of the last reported sales price per share of the
Fund's Common Stock on the NYSE for the five trading days ending with the
Expiration Date (the "Subscription Price").
Exercising Rights Holders will not know the actual Subscription Price at
the time of exercise and will be required to pay for the Shares at the
Estimated Subscription Price of $13.25 per Share (based on approximately 95%
of the last reported sales price on August 20, 1999). The actual Subscription
Price may be more than the Estimated Subscription Price.
The Fund announced the Offer after the close of trading on the NYSE on
July 14, 1999. The NAV per share of Common Stock at the close of business on
July 9, 1999 (the last trading date on which the Fund publicly reported its
NAV prior to the announcement) and on August 20, 1999 was $13.47 and $13.03,
respectively, and the last reported sales price of a share of the Fund's
Common Stock on the NYSE on those dates was $15.75 and $13.88, respectively.
Non-Transferability of Rights
The Rights are non-transferable and, therefore, may not be purchased or
sold. Rights not exercised will expire without residual value when the Offer
expires. The Rights will not be listed for trading on the NYSE or any other
securities exchange. However, the Shares to be issued pursuant to the Offer
will be listed for trading on the NYSE, subject to notice of issuance.
Expiration of the Offer
The Offer will expire at 5:00 P.M., New York City time, on September 24,
1999 unless extended by the Fund. The Rights will expire on the Expiration
Date and thereafter may not be exercised. 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., New York City time, on the next
Business Day following the previously scheduled Expiration Date. Stockholders
may contact the Fund's Information Agent, Shareholder Communications Corp. (at
the telephone number listed below) after the Expiration Date to inquire as to
whether the Offer has been extended. 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 American Stock Transfer & 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 $25,500 which includes
reimbursement for estimated 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 Common Stock. Questions regarding the Subscription
Certificates should be directed to American Stock Transfer & Trust Company, 40
Wall Street, New York, New York 10005, U.S.A.; stockholders 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 American Stock
Transfer & Trust Company by one of the methods described below. Alternatively,
Notices of Guaranteed Delivery may be sent by facsimile to (718) 234-5001 to
be received by the Subscription Agent prior to 5:00 P.M., New York City time,
on the Expiration Date. Facsimiles should be confirmed by telephone at
(718) 921-8200 or toll free at (800) 937-5449. The Fund will accept only
properly completed and executed Subscription Certificates actually received at
any of the addresses
16
<PAGE>
listed below, prior to 5:00 P.M., New York City 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:
American Stock Transfer & Trust Company
40 Wall Street, 46/th/ Floor
New York, New York 10005
U.S.A.
(2) BY OVERNIGHT COURIER:
American Stock Transfer & Trust Company
40 Wall Street, 46/th/ Floor
New York, New York 10005
U.S.A.
(3) BY HAND:
American Stock Transfer & Trust Company
40 Wall Street, 46/th/ Floor
New York, New York 10005
U.S.A.
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 Restrictions," will be mailed to Record Date
Stockholders or, if a stockholder's shares of Common Stock 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 at the Estimated Subscription Price by the Expiration Date. Rights may
also be exercised by contacting your broker, banker or trust company. They 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. The Notice of Guaranteed Delivery must be received by
the Subscription Agent by the Expiration Date as set forth below. 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 is received by the Subscription Agent by the close of business on
September 29, 1999, the third Business Day after the Expiration Date. A fee
may be charged for this service. Fractional shares will not be issued upon the
exercise of Rights. Record Date Stockholders issued fewer than three Rights
are entitled to subscribe for one Share pursuant to the Primary Subscription.
Completed Subscription Certificates must be received by the Subscription Agent
prior to 5:00 P.M., New York City 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", in which case
Notices of Guaranteed Delivery are due on the Expiration Date).
Stockholders Who Are Record Owners. Stockholders who are record owners
can choose between either option to exercise their Rights as described below
under "Payment for Shares." If time is of the essence, option (2) under
"Payment for Shares" below will permit delivery of the Subscription
Certificate and payment after the Expiration Date.
Stockholders Whose Shares Are Held by a Nominee. Stockholders whose
shares are held by a nominee, such as a bank, broker or trustee, must contact
that nominee to exercise their Rights. In such
17
<PAGE>
case, the nominee will complete the Subscription Certificate on behalf of the
stockholder and arrange for proper payment by one of the methods described
below under "Payment for Shares."
Nominees. Nominees who hold shares of Common Stock 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
the Information Agent at its telephone number and address listed below:
Shareholder Communications Corp.
17 State Street
New York, NY 10005
Stockholders call toll free: (800) 603-1720
Banks and Brokers call: (212) 805-7113
Stockholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated
to be $100,000, plus reimbursement for its reasonable out-of-pocket expenses
related to the Offer.
Payment for Shares
Stockholders who wish to acquire Shares pursuant to the Offer may choose
between the following methods of payment:
(1) A Record Date Stockholder may send the Subscription Certificate
together with payment for the Shares acquired in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege to the Subscription Agent based on the
Estimated Subscription Price of $13.25 per share. 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., New
York City 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 MORGAN STANLEY DEAN WITTER HIGH
YIELD 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., NEW YORK CITY 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, a Record Date Stockholder may acquire shares,
and a subscription will be accepted by the Subscription Agent if, prior
to 5:00 P.M., New York City time, on the Expiration Date, the
Subscription Agent has received a Notice of Guaranteed Delivery by
facsimile (telecopy) or otherwise from a bank, a trust company or a NYSE
member guaranteeing
18
<PAGE>
delivery of (i) payment of the Estimated Subscription Price of $13.25
per share for the Shares subscribed for in the Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege, and (ii) 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 is received by
the Subscription Agent by the close of business on September 29, 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) the Subscription Price per Share and total purchase price of
the shares, and (iv) any additional amount payable by such Record date
Stockholder to the Fund or any excess to be refunded by the Fund to such
Stockholder, in each case based on the Subscription Price. If any Record Date
Stockholder exercises his or her right to acquire shares pursuant to the Over-
Subscription Privilege, any such excess payment that would otherwise be
refunded to the Record Date Stockholder will be applied by the Fund toward
payment for shares acquired pursuant to the exercise of the Over-Subscription
Privilege. Any additional payment required from a Record Date Stockholder must
be received by the Subscription Agent within ten business days after the
Confirmation Date. Any excess payment to be refunded by the Fund to a Record
Date Stockholder will be mailed by the Subscription Agent to such Record Date
Stockholder as promptly as possible. 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 MORGAN STANLEY DEAN WITTER
HIGH YIELD FUND, INC.
If a Record Date Stockholder who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
additional amounts due by the tenth business day after the Confirmation Date,
the Fund reserves the right to take any or all of the following actions: (i)
sell such subscribed and unpaid-for shares to other Record Date Stockholders,
(ii) apply any payment actually received toward the purchase of the greatest
whole number of shares that could be acquired by such Record Date Stockholder
upon the exercise of the Primary Subscription and/or Over-Subscription
Privilege, and/or (iii) exercise any and all other rights or remedies to which
the Fund may be entitled.
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., NEW YORK CITY 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 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
Fund 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.
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<PAGE>
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."
Delivery of Share Certificates
Certificates representing Shares acquired in the Primary Subscription
will be mailed promptly after the expiration of the Offer once full payment
for such Shares has been received and cleared. Certificates representing
Shares acquired pursuant to the Over-Subscription Privilege will be mailed as
soon as practicable after full payment for such Shares has been received and
cleared and all allocations have been completed. Participants in the Fund's
Dividend Reinvestment and Cash Purchase Plan (the "Plan") will have any Shares
acquired in the Primary Subscription and pursuant to the Over-Subscription
Privilege credited to their stockholder dividend reinvestment accounts in the
Plan. Participants in the Plan wishing to exercise Rights for the shares of
Common Stock held in their accounts in the Plan must exercise such Rights in
accordance with the procedures set forth above. Stockholders whose shares of
Common Stock 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 Restrictions
Subscription Certificates will not be mailed to Record Date Stockholders
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 Stockholders will
receive 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 Stockholders' accounts until instructions are received to exercise
the Rights. Upon request, the Subscription Agent will send a copy of the
Prospectus to such Foreign Record Date Stockholders. If no instructions have
been received by 5:00 P.M., New York City time, on the Expiration Date, the
Rights of those Foreign Record Date Stockholders will expire.
Federal Income Tax Consequences of the Offer
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Stockholders will not
result in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights. No loss will
be realized if the Rights expire without exercise.
2. The basis of a Right will be (a) to a holder of Common Stock to
whom it is issued and who exercises the Right (i) if the fair market
value of the Right immediately after issuance is less than 15% of the
fair market value of the Common Stock with regard to which it is issued,
zero (unless the holder elects, by filing a statement with his timely
filed federal income tax return for the year in which the Rights are
received, to allocate the basis of the Common Stock between the Right
and the Common Stock based on their respective fair market values
immediately after the Right is issued), and (ii) if the fair market
value of the Right immediately after issuance is 15% or more of the fair
market value of the Common Stock with regard to which it is issued, a
portion of the basis in the Common Stock based upon their respective
fair market values immediately after the Right is issued, and (b) to a
holder of Common Stock to whom it is issued and who allows the Right to
expire, zero.
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<PAGE>
3. The holding period of a Right received by a Record Date
Stockholder includes the holding period of the Common Stock with regard
to which the Right is issued. If the Right is exercised, the holding
period of the Common Stock acquired begins on the date the Right is
exercised.
4. A Record Date Stockholder's basis for determining gain or loss
upon the sale of a Share acquired upon the exercise of a Right will be
equal to the sum of the Record Date Stockholder's basis in the Right, if
any, and the Subscription Price per Share. A Record Date Stockholder's
gain or loss recognized upon a sale of a Share acquired upon the
exercise of a Right will be capital gain or loss if the Share was held
at the time of sale as a capital asset and will be long-term capital
gain or loss if the Share is held for more than one year. See
"Taxation - U.S. Federal Income Taxes" for a summary of the capital
gains rates applicable to capital gains or losses recognized upon the
sale of Shares.
The foregoing is a general summary of the material U.S. federal income
tax consequences of the Offer under the provisions of the U.S. Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code"), and Treasury
regulations presently in effect that are generally applicable to Record Date
Stockholders that are United States persons within the meaning of the Internal
Revenue Code, and does not cover foreign, state or local taxes. The Internal
Revenue Code and such regulations are subject to change by legislative or
administrative action, which may be retroactive. Exercising Rights Holders
should consult their tax advisers regarding specific questions as to foreign,
federal, state or local taxes. See "Taxation."
Notice of Net Asset Value Decline
The Fund has, as required by the Securities and Exchange Commission's
("SEC") registration form, undertaken to suspend the Offer until it amends
this Prospectus if, subsequent to the effective date of the Fund's
Registration Statement, the Fund's NAV declines more than 10% from its NAV as
of that date. Accordingly, the Expiration Date would be extended and the Fund
would notify Record Date Stockholders of any such decline and permit
Exercising Rights Holders to cancel their exercise of Rights.
Employee Plan Considerations
Stockholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), plans of self-employed individuals and
individual retirement accounts (collectively, "Retirement Plans") should be
aware that additional contributions of cash to the Retirement Plan (other than
rollover contributions or trustee-to-trustee transfers from other Retirement
Plans) in order to exercise Rights would be treated as contributions to the
Retirement Plan and, when taken together with contributions previously made,
may result in, among other things, excise taxes for excess or nondeductible
contributions. In the case of Retirement Plans qualified under Section 401(a)
of the Internal Revenue Code and certain other Retirement Plans, additional
cash contributions could cause the maximum contribution limitations of Section
415 of the Internal Revenue Code 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 Section 511 of the Internal Revenue Code. If any
portion of an Individual Retirement Account ("IRA") is used as security for a
loan, the portion so used will be treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Internal Revenue Code contain prohibited transaction rules that may impact the
exercise of Rights. Due to the complexity of these rules and the penalties for
noncompliance, Retirement Plans should consult with their counsel and other
advisers regarding the consequences of their exercise of Rights under ERISA
and the Internal Revenue Code.
21
<PAGE>
Important Dates to Remember
<TABLE>
<CAPTION>
Event Date
----- ----
<S> <C>
Record Date............. August 23, 1999
Subscription Period..... August 23, 1999 to
September 24, 1999 *
Expiration Date......... September 24, 1999 *
Subscription
Certificates and
Payment for Shares
Due +.................. September 24, 1999 *
Notice of Guaranteed
Delivery Due +......... September 24, 1999 *
Payments and
Subscription
Certificates for
Guarantees
of Delivery Due......... September 29, 1999 *
Confirmation to
Participants........... October 6, 1999*
</TABLE>
-----------
* Unless the Offer is extended.
+ A stockholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed
Delivery by September 24, 1999, unless the Offer is extended.
USE OF PROCEEDS
If all the Rights are exercised in full at the Estimated Subscription
Price of $13.25 per Share, the net proceeds of the Offer to the Fund assuming
all 2,960,000 shares offered hereby are sold are estimated to be approximately
$38,173,650 after deducting offering expenses payable by the Fund estimated at
approximately $360,000. The Investment Manager anticipates that the Fund will
take up to 30 days from its receipt of the net proceeds of the Offer to invest
or otherwise employ such proceeds (for example, to reduce leverage), but in no
event will any such use take longer than six months. Pending the use of the
proceeds of the Offer, the proceeds will be held in U.S. Government securities
(which term includes obligations of the United States Government, its agencies
or instrumentalities) and other high-quality short-term money market
instruments. While the proceeds are invested in U.S. Government securities and
other high-quality, short-term money market instruments, the proceeds will not
be invested in securities consistent with the Fund's primary objective of high
current income.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
Dilution
Record Date Stockholders who do not fully exercise their Rights in the
Primary Subscription should expect that they will, at the completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. The Fund cannot state precisely the amount of any such dilution in
share ownership, and therefore voting power, because the Fund does not know at
this time what proportion of the Shares will be subscribed.
Furthermore, the Subscription Price per share for the Offer may be lower
than the Fund's NAV per share. Any rights offering priced at a discount to the
Fund's NAV per share and involving payment of expenses by the Fund entails
some dilution in the NAV per share. Dilution is the decrease in NAV per share
that results from the Fund's issuance of new shares at a discount to current
NAV per share when the rights are exercised and from the Fund's payment of the
expenses of the Offer. The Offer may result in a dilution of NAV for all
stockholders, which will disproportionately affect stockholders who do not
exercise their Rights. In addition, there also may be substantial dilution to
the extent that the Fund increases the number of shares subject to
subscription by up to 25% in order to satisfy over-subscription requests.
22
<PAGE>
Although it is not possible to state precisely the amount of any decrease in
NAV because it is not known at the date of this Prospectus how many shares
will be subscribed for, or what the Subscription Price will be, the dilution
could be substantial.
For example, assuming that all Rights are exercised at the Estimated
Subscription Price of $13.25, the NAV per share at the Expiration Date was
$13.50, the Fund issues an additional 25% of Shares to satisfy over-
subscription requests, and assuming the deduction of all expenses related to
the issuance of the Shares, the Fund's NAV per share would be reduced by
approximately $0.17 per share or 1.26%.
High Yield Investments
At any one time, substantially all of the Fund's assets may be invested
in obligations or securities that are rated below investment grade by
recognized rating services such as Moody's and S&P, or if unrated, are
determined to be of comparable quality by the Investment Manager. Non-
investment grade securities (that is, rated "Ba" or lower by Moody's or "BB"
or lower by S&P) are commonly referred to as "junk bonds" and are regarded as
predominantly speculative and involve major risk exposure to adverse
conditions. Some of the high yield securities held by the Fund, which may not
be paying interest currently or may be in payment default, may be comparable
to securities rated as low as "C" by Moody's or "CCC" or lower by S&P. These
securities are considered to have extremely poor prospects of ever attaining
any real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions or to be in default or not current in the payment of interest or
principal.
Securities rated below investment grade and unrated securities generally
offer a higher current yield than that available from higher grade issues, but
typically involve greater risk. Securities rated below investment grade and
unrated securities are especially subject to adverse changes in general
economic conditions, to changes in the financial condition of their issuers
and to price fluctuation in response to changes in interest rates. During
periods of economic downturn or rising interest rates, issuers of securities
rated below investment grade and unrated instruments may experience financial
stress that could adversely affect their ability to make payments of principal
and interest and increase the possibility of default. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of securities rated below investment grade
and unrated securities especially in a market characterized by a low volume of
trading.
The value of the high yield securities held by the Fund, and thus the
net asset value of the Common Stock, generally will fluctuate with (i) changes
in the perceived creditworthiness of the issuers of those securities and (ii)
movements in interest rates. The extent of the fluctuation of the Fund's NAV
will depend on various other factors, such as the average maturity of the
Fund's investments, the extent to which the Fund engages in borrowing and
other leveraging transactions, and the extent to which the Fund hedges its
interest rate and currency exchange rate risks. The Investment Manager will
make independent evaluations as to the creditworthiness of issuers of debt
securities that may differ from those of the recognized rating services. The
Fund's success in attaining its investment objectives will depend largely on
the Investment Manager's evaluation of the creditworthiness of issuers.
The market for high-yield, high risk securities has expanded rapidly in
recent years. An economic downturn or an increase in interest rates could have
a negative effect on the high-yield, high risk securities market and on the
market value of the high-yield, high risk securities held by the Fund, as well
as on the ability of the issuers of such securities to repay principal and
interest on their borrowings. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities. As a
result, the Investment Manager could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such
lower rated
23
<PAGE>
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Fund's net asset value.
Prices for high yield securities may be affected by legislative and
regulatory developments. Changes in law could adversely affect the Fund's net
asset value and investment practices, the secondary market for high yield
securities, the financial condition of issuers of high yield securities and
the value of outstanding high yield securities.
Lower rated or unrated securities also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, potentially
resulting in a decreased return for investors.
Considerations Relating to Investments in Non-U.S. Issuers
Investing in securities of non-U.S. issuers involves certain
considerations not typically associated with investing in the securities of
U.S. issuers. For example, investments may be restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
investment in the securities of certain non-U.S. issuers and increase the
costs and expenses of such investments to the Fund. In addition, governmental
approval may be required for the repatriation of investment income, capital or
the proceeds of sales of securities of non-U.S. issuers. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
No established secondary markets may exist for many of the non-U.S. high
yield securities in which the Fund will invest. This may have an adverse
effect on market price and the Fund's ability to dispose of particular
instruments when necessary to meet its liquidity requirements or in response
to specific economic events such as a deterioration in the creditworthiness of
the issuer. In addition, non-U.S. issuers are not generally subject to
accounting, auditing and financial reporting standards, practices and
disclosure requirements comparable to those applicable to U.S. issuers.
Consequently, there may be less publicly available information about a non-
U.S. issuer than about a U.S. issuer. Furthermore, there is generally less
government supervision and regulation of foreign securities markets, brokers
and securities issuers than in the United States. In addition, laws in foreign
countries governing business organizations, bankruptcy and insolvency may
provide less protection to security holders such as the Fund than that
provided by U.S. laws. The Fund is also subject to currency risk which is the
risk that fluctuations in the exchange rates between the U.S. dollar and
foreign currencies may negatively affect the value of the Fund's investments.
The economies of foreign countries may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rate of inflation, currency depreciation, capital reinvestment, resource self-
sufficiency and balance of payments position. Certain developing countries
have historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations, large amounts of
external debt, balance of payments and trade difficulties and extreme poverty
and unemployment. Also, there is a possibility of nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments (including war)
which could affect adversely the economies of such countries or the value of
the Fund's investments in those countries.
With respect to the Fund's investments in developing country government
debt securities, the issuer or governmental authority that controls the
repayment of a developing country's debt may not be able or willing to repay
the principal or interest when due in accordance with the terms of such debt.
A debtor's willingness or ability to repay principal and interest due in a
timely manner may be affected by its cash flow situation and, in the case of a
government debtor, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service
24
<PAGE>
burden to the economy as a whole and the political constraints to which a
government debtor may be subject. Government debtors may default on their debt
and may also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
debtor's implementation of economic reforms or economic performance and the
timely service of such debtor's obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay principal or
interest when due may result in the cancellation of such third parties'
commitments to lend funds to the government debtor, which may further impair
such debtor's ability or willingness to timely service its debts. Holders of
government debt, including the Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to government debtors.
If a government obligor defaults on its obligations, the Fund may have limited
legal recourse against the issuer or guarantor. In some cases, remedies must
be pursued in the courts of the defaulting party itself, and the ability of
the holder of foreign government debt securities to obtain recourse may be
subject to the political climate in the relevant country.
Government obligors in developing countries are among the world's
largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. The issuers of the
government debt securities in which the Fund may invest have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included reducing and rescheduling interest and principal payments by
negotiating new or amended credit agreements or converting outstanding
principal and unpaid interest to Brady Bonds, and obtaining new credit to
finance interest payments. Holders of certain foreign government debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the foreign government debt securities in which the Fund may
invest will not be subject to restructuring arrangements or to requests for
new credit which may adversely affect the Fund's holdings. Furthermore,
certain participants in the secondary market for such debt may be directly
involved in negotiating the terms of these arrangements and may therefore have
access to information not available to other market participants.
Risk of Leverage
The Fund is authorized to borrow money from banks and other entities,
and to issue shares of preferred stock or short-term debt securities, in an
amount equal to up to 33 1/3% of the Fund's total assets (including the amount
obtained from leverage) less all liabilities and indebtedness other than the
leverage, and may use the proceeds from the leveraging for investment
purposes. For a description of the various leverage techniques the Fund
intends to use, see "Investment Objectives and Policies -- Leverage" on page
31 of this Prospectus. Since its inception, the Fund has generally been
leveraged, as of each month end date, in the range of approximately 0% of its
assets to 27% of its assets through the use of reverse repurchase agreements.
Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Stock. These include the possibility of
higher volatility of the NAV of the Common Stock and potentially more
volatility in the market value of the Common Stock. So long as the Fund is
able to realize a higher net return on its investment portfolio than the then
current interest or dividend rate of any leverage together with other related
expenses, the effect of the leverage will be to cause holders of Common Stock
to realize a higher current net investment income than if the Fund were not so
leveraged. On the other hand, to the extent that the then current interest or
dividend rate on any leverage together with other related expenses, approaches
the net return on the Fund's investment portfolio, the benefit of leverage to
holders of Common Stock will be reduced, and if the then current interest or
dividend rate on any leverage were to exceed the net return on the Fund's
Portfolio, the Fund's leveraged capital structure would result in a lower rate
of return to holders of Common Stock than if the Fund were not so leveraged.
Similarly, since any decline in the NAV of the Fund's investments will be
borne entirely
25
<PAGE>
by holders of the Common Stock, the effect of leverage in a declining market
would be a greater decrease in NAV applicable to the Common Stock than if the
Fund were not leveraged. Any such decrease would likely be reflected in a
decline in the market price of the Common Stock. If the Fund's current
investment income were not sufficient to meet interest or dividend
requirements on any leverage (or if any decrease in the NAV of the Fund's
investments would violate the 1940 Act asset coverage requirements) it could
be necessary for the Fund to liquidate certain of its investments sooner than
would otherwise have been the case, thereby reducing the NAV attributable to
the Common Stock.
The Fund's use of leverage will be subject to the provisions of the 1940
Act, including asset coverage requirements and restrictions on the declaration
of dividends and distributions to holders of Common Stock or purchases of
Common Stock in the event such asset coverage requirements are not met. The
1940 Act also requires that holders of preferred stock, and in certain
circumstances holders of debt securities, have certain voting rights as set
forth in the "Description of Capital Stock" section of this Prospectus on page
51.
Foreign Currency Considerations
Since the Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates could affect the value of securities in the Fund's portfolio and the
unrealized appreciation or depreciation of investments. Furthermore, the Fund
may incur costs in connection with conversions between various currencies.
Foreign exchange dealers realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a dealer
normally will offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire immediately to
resell that currency to the dealer. The Fund will conduct its foreign currency
exchange transactions either at the spot rate prevailing in the foreign
currency exchange market, or through entering into forward, futures or options
contracts to purchase or sell foreign currencies. To the extent available, the
Fund may seek to protect the value of some portion or all of its non-U.S.
dollar-denominated portfolio holdings against currency risks by engaging in
hedging transactions as set forth in this Prospectus. There can be no
guarantee that instruments suitable for hedging currency will be available at
the time when the Fund wishes to use them. For a description of such hedging
strategies and certain considerations relating to them, see "Investment
Objectives and Policies -- Hedging" and Appendix B.
Net Asset Value Discount; Nondiversification
The Fund is a closed-end investment company. Shares of closed-end
investment companies frequently trade at a discount from NAV. This
characteristic of shares of a closed-end fund is a risk separate and distinct
from the risk that a fund's net asset value will decrease. It should be noted,
however, that shares of some closed-end funds that invest principally in high
yield securities have traded at premiums to NAV. The Fund cannot predict
whether its own shares will trade at, below or above NAV. The risk of
purchasing shares of a closed-end investment company which might trade at a
discount from NAV is more pronounced for investors who wish to sell their
shares in a relatively short period of time. The Fund is intended primarily
for long-term investors and should not be considered as a vehicle for trading
purposes.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Fund may invest a greater proportion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. The Fund,
however, intends to comply with the diversification requirements imposed by
the Internal Revenue Code for qualification as a regulated investment company.
Dividends and Distributions
Subject to market conditions, the Fund seeks to provide holders of its
Common Stock with a relatively stable level of dividends per share. However,
the Fund cannot give any assurance that it will be
26
<PAGE>
able to maintain its current level of dividends per share. The Board of
Directors may, in its sole discretion, change the Fund's current level of
dividends per share in response to market or other conditions. The Fund's
ability to maintain a stable level of dividends is a function of the yield
generated by the Fund's investments, which depends on market conditions at the
time those investments are made and on the performance of those investments.
Based on information provided by the Investment Manager on current
market conditions in the high yield bond market and available leverage
opportunities, the Board of Directors believes that the offer will not result
in a change in the Fund's current level of dividends per share for the
foreseeable future.
The Fund will not be permitted to declare dividends or other
distributions with respect to the Common Stock or any series of preferred
shares or purchase shares of Common Stock or any series of preferred shares
unless at the time thereof the Fund meets certain asset coverage requirements
applicable to any debt or preferred shares the Fund may have outstanding,
including those imposed by the 1940 Act. Further, the Fund will not be
permitted to pay any dividends or other distributions with respect to the
Common Stock or any series of preferred shares if a default or an event of
default has occurred and is continuing under any credit or other agreements
applicable to any debt or preferred shares the Fund may have outstanding or if
such payment of dividend or distribution would result in a default or an event
of default under any such agreements. Failure to pay dividends or other
distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Internal Revenue Code.
In the event the Fund fails to satisfy certain asset coverage
requirements, the Fund may be required to immediately pay any loans (together
with interest accrued thereon) outstanding. Repayment of any loans would
reduce the Fund's leverage and could negatively affect potential returns with
respect to the Common Stock.
Year 2000
The investment advisory services provided to the Fund by the Investment
Manager depend on the smooth operation of its computer systems. Many computer
and software systems in use today cannot recognize the year 2000, but revert
to 1900 or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Investment Manager has
been actively working on necessary changes to its own computer systems to deal
with the year 2000 problem and expects that its systems will be adapted before
that date. There can be no assurance, however, that the Investment Manager
will be successful. In addition, other unaffiliated service providers may be
faced with similar problems. The Investment Manager is monitoring their
remedial efforts, but there can be no assurance that they and the services
they provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
You should carefully consider your ability to assume the foregoing risks
before making an investment in the Fund. An investment in shares of the Fund
is not appropriate for all investors.
27
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is to seek a high level of
current income. As a secondary objective, the Fund seeks capital appreciation.
Under normal market conditions, at least 65% of the Fund's total assets will
be invested in high yield securities issued by U.S. corporations. In addition,
the Fund may invest up to 35% of its total assets in high yield securities
issued by non-U.S. corporations and by government and government-related
issuers located in developing countries, provided that no more than 20% of the
Fund's total assets may be invested in high yield securities issued by
government or government-related issuers in developing countries. The high
yield securities in which the Fund invests include debt obligations and
preferred stock. Such securities generally will be rated, at the time of
investment, below investment grade (that is, rated "Ba" or lower by Moody's or
"BB" or lower by S&P) or, if not rated, determined by the Investment Manager
to be of comparable quality. Debt securities rated by both Moody's or the S&P
need only satisfy the foregoing ratings standards with respect to either the
Moody's or the S&P rating. There is no minimum rating requirement for the
securities in which the Fund invests. However, the Fund anticipates that under
normal market conditions no more than 25% of the Fund's total assets will be
rated, at the time of investment, below "B" by Moody's or S&P, or will be
unrated and of comparable quality. Yields on these securities generally, at
the time of investment exceed yields on higher-rated securities.
The Fund's investment objectives are fundamental policies which may not
be changed without the approval of a majority of the Fund's outstanding voting
securities. As used herein, a "majority of the Fund's outstanding voting
securities" means the lesser of (i) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented, and (ii)
more than 50% of the outstanding shares. There is no assurance the Fund will
be able to achieve its investment objectives.
The Fund may acquire high yield securities including debt obligations
(e.g., bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts and commercial paper) and preferred
stock. The Fund's high yield investments may have equity features, such as
conversion rights or warrants and the Fund may invest up to 10% of its total
assets in equity securities other than preferred stock (common stocks,
warrants and rights and limited partnership interests). The Fund also may
invest up to 20% of its total assets in fixed income securities that are
investment grade (e.g., rated in one of the top four categories or of
comparable quality as determined by the Investment Manager) and have
maturities of one year or less. The Fund may invest in or own securities of
companies in various stages of financial restructuring, bankruptcy or
reorganization which are not currently paying interest or dividends to the
extent that the total value, at time of purchase, of all such securities will
not exceed 10% of the value of the Fund's total assets.
The Fund's investments in government and government-related debt
securities may consist of (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in developing countries, (ii) debt securities
or obligations issued by government owned, controlled or sponsored entities
located in developing countries, and (iii) interests in issuers organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by any of the entities described above. The Fund also may
invest in certain debt obligations customarily referred to as "Brady Bonds,"
which are created through the exchange of existing commercial bank loans to
foreign entities for new obligations in connection with debt restructurings.
Brady Bonds may be collateralized or uncollateralized and issued in various
currencies (although most are U.S. dollar-denominated), and they are actively
traded in the over-the-counter secondary market. The Fund may purchase Brady
Bonds either in the primary or secondary markets.
Selection of Investments
The Fund invests substantially all of its assets in obligations or
securities that are, at the time of investment, rated below investment grade
(that is, rated "Ba" or lower by Moody's or "BB" or lower by S&P) or, if not
rated, determined by the Investment Manager to be of comparable quality.
Ratings of S&P
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and Moody's represent their opinions of the quality of the securities they
undertake to rate at the time of issuance. However, ratings are not absolute
standards of quality and may not reflect changes in an issuer's
creditworthiness. Accordingly, while the Investment Manager considers ratings,
it performs its own analysis and does not rely principally on ratings. The
Investment Manager considers, among other things, the price of the security,
and the financial history and condition, the prospects and the management of
an issuer in selecting securities for the Fund. The Fund may buy unrated
securities that the Investment Manager believes are comparable to rated
securities that are consistent with the Fund's objective and policies. The
Investment Manager may vary the average maturity of the securities in the Fund
without limit and there is no restriction on the maturity of any individual
security.
A description of the ratings used by Moody's and S&P is set forth in
Appendix A to this Prospectus.
Temporary Investments
During periods in which the Investment Manager believes changes in
economic, financial or political conditions make it advisable, the Fund may,
for temporary defensive purposes, reduce its holdings in high yield securities
and invest part or all of its total assets in cash or in certain other short-
term (less than twelve months to maturity) debt securities, including
certificates of deposit, commercial paper, notes, obligations issued or
guaranteed by the United States government or any of its agencies or
instrumentalities and repurchase agreements involving such government
securities. While the Fund conducts such a defensive strategy, the Fund's
assets will not be invested in securities consistent with the Fund's primary
objective of high current income.
Other Investments
Private Placements and Restricted Securities. The Fund may invest in
privately placed securities, including securities that are not registered
under the Securities Act of 1933, as amended (the "Securities Act"), but that
can be offered and sold to qualified, institutional buyers under Rule 144A
under the Securities Act. Investors should note that these investments may be
considered a speculative activity and may involve greater risk and expense to
the Fund.
Convertible Securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible
securities have several unique investment characteristics such as (1) higher
yields than common stocks, but lower yields than comparable nonconvertible
securities, (2) a lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (3) the potential for
capital appreciation if the market price of the underlying common stock
increases.
The Fund may invest up to 10% of its total assets in convertible
securities; however, it has no current intention of converting any convertible
securities it may own into equity securities or holding them as an equity
investment upon conversion. A convertible security might be subject to
redemption at the option of the issuer at a price established in the
convertible security's governing instrument. If a convertible security held by
the Fund is called for redemption, the Fund may be required to permit the
issuer to redeem the security, convert it into the underlying common stock or
sell it to a third party.
Warrants. The Fund may invest up to 10% of its total assets in warrants,
which are securities permitting, but not obligating, their holder to subscribe
for other securities. The Fund may invest in warrants for equity securities
that are acquired as units with debt instruments and warrants for debt
securities. Warrants do not carry with them the right to dividends or voting
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As
a result, an investment in warrants may be considered more speculative than
certain other types
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of investments. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to its expiration date. The Fund does
not intend to retain in its portfolio any common stock received upon the
exercise of a warrant and will sell the common stock as promptly as
practicable and in a manner that it believes will reduce its risk of a loss in
connection with the sale.
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. The Fund may
also invest in zero coupon, pay-in-kind or deferred payment securities. Zero
coupon securities are securities that are sold at a discount to par value and
on which interest payments are not made during the life of the security. Upon
maturity, the holder is entitled to receive the par value of the security.
While interest payments are not made on such securities, holders of such
securities are deemed to have received annually "phantom income." Because the
Fund will distribute its "phantom income" to stockholders, to the extent that
stockholders elect to receive dividends in cash rather than reinvesting such
dividends in additional shares, the Fund will have fewer assets with which to
purchase income producing securities. The Fund accrues income with respect to
these securities prior to the receipt of cash payments. Pay-in-kind securities
are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. Deferred payment securities are securities that
remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Zero coupon, pay-in-kind and deferred payment securities are
subject to greater fluctuation in value and may have lesser liquidity in the
event of adverse market conditions than comparably rated securities paying
cash interest at regular interest payment periods.
Loan Participations and Assignments. The Fund may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between an
issuer of debt obligations and one or more financial institutions ("Lenders").
The Fund's investments in Loans are expected in most instances to be in the
form of participations in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. In a typical
Participation, the Fund will have a contractual relationship only with the
Lender and not with the borrower; and consequently, the Fund will not have the
right to enforce the Loan against the borrower. The Fund will have the right
to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt
by the Lender of the payments from the borrower. As a result, the Fund may be
subject to the credit risk of both the borrower and the Lender that is selling
the Participation. Certain Participations may be structured in a manner
designed to avoid purchasers of Participations being subject to the credit
risk of the Lender with respect to the Participation, but even under such a
structure, in the event of the Lender's insolvency, the Lender's servicing of
the Participation may be delayed and the assignability of the Participation
impaired. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the
Investment Manager to be creditworthy.
When the Fund purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan although the rights and obligations
acquired by the Fund as the purchaser of an Assignment may differ from, and be
more limited than, those held by the assigning Lender. The Fund may have
difficulty disposing of Assignments and Participations because to do so it
will have to assign such interests to a third party. Because there is no
liquid market for such interests, the Fund anticipates that such interests
could be sold only to a limited number of institutional investors. The lack of
a liquid secondary market may have an adverse impact on the value of such
interests and the Fund's ability to dispose of particular Assignments or
Participations when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to these interests for purposes of valuing the Fund's portfolio
and calculating its NAV.
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Leverage
The Fund is authorized to borrow money from banks and other entities,
and to issue shares of preferred stock or short-term debt securities, in an
amount equal to up to 33 1/3% of the Fund's total assets including the amount
obtained from leverage and may use the proceeds from the leveraging for
investment purposes. It is anticipated that the interest payments on any
borrowing or short-term debt securities or the dividends on any preferred
stock will reflect short-term rates, and that the net return on the Fund's
portfolio, including the proceeds of any leverage, will exceed the interest or
dividend rate applicable to the leverage. Whether to leverage through bank
borrowings or the issuance of preferred stock or short-term debt securities,
and the terms of and the timing of such leverage, will be determined by the
Fund's Board of Directors. The extent to which the Fund is leveraged from time
to time will vary depending on the judgment of the Board of Directors, in
consultation with the Investment Manager, regarding market conditions. Through
these leveraging techniques, the Fund will seek to obtain a higher return for
holders of Common Stock than if the Fund were not leveraged. Since its
inception, the Fund generally has been leveraged, as of each month end date,
in the range of approximately 0% of its assets to 27% of its assets through
the use of reverse repurchase agreements. Utilization of leverage is a
speculative investment technique and involves certain risks to the holders of
Common Stock. See "Risk Factors and Special Considerations -- Risk of
Leverage."
In addition, the Fund may apply for a rating from Moody's and/or S&P on
any preferred stock or short-term debt which it issues; however, no minimum
rating is required for the issuance of preferred stock or short-term debt by
the Fund. The Fund believes that obtaining one or both of such rating for its
preferred stock or short-term debt securities will enhance the marketability
of the preferred stock or short-term debt securities and thereby reduce the
dividend rate on the preferred stock or interest requirements of such short-
term debt securities from that which the Fund would be required to pay if the
preferred stock or short-term debt securities were not so rated. The rating
agencies for any preferred stock or short-term debt securities may require
asset coverage maintenance ratios in addition to those imposed by the 1940
Act. The ability of the Fund to comply with such asset coverage maintenance
ratios may be subject to circumstances beyond the control of the Fund such as
market conditions for its portfolio securities. The Fund expects that the
terms of any preferred stock or short-term debt securities will provide for
mandatory redemption of the preferred stock or repayment of short-term debt in
the event the Fund fails to meet such asset coverage maintenance ratios. In
such circumstances, the Fund may have to liquidate portfolio securities in
order to meet redemption or repayment requirements. This would have the effect
of reducing the NAV to holders of the Common Stock and could reduce the Fund's
net income in the future.
The use of leverage may entail certain costs and expenses such as
underwriting discounts or placement fees, fees associated with the
registration with the SEC, filing under state securities law, rating agency
fees, legal and accounting fees, printing costs and certain other ongoing
expenses such as administrative and accounting fees. These costs and expenses
will be borne by the Fund and will reduce net assets available to holders of
the Common Stock.
The Fund expects that all of its borrowing will be made on a secured
basis. The Fund's custodian will either segregate the assets securing the
Fund's borrowing for the benefit of the Fund's lenders or arrangements will be
made with a suitable sub-custodian, as determined by the Fund's Board of
Directors, which may include a lender. If the assets used to secure the
borrowing decrease in value, the Fund may be required to pledge additional
collateral to the lender in the form of cash or securities to avoid
liquidation of those assets. The rights of any lenders to the Fund to receive
payments of interest on and repayments of principal of borrowings will be
senior to the rights of the Fund's stockholders, and the terms of the Fund's
borrowings may contain provisions that limit certain activities of the Fund
and could result in precluding the purchase of instruments that the Fund would
otherwise purchase.
If the Fund leverages through preferred stock, under the requirements of
the 1940 Act, the value of the Fund's total assets, less all liabilities and
indebtedness of the Fund not represented by senior securities, as defined in
the 1940 Act, must be equal, immediately after any such issuance of preferred
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stock, to at least 200% of the aggregate amount of senior securities
representing indebtedness plus the aggregate liquidation preference of any
outstanding preferred stock. Such percentage must also be met any time the
Fund pays a dividend or makes any other distribution on Common Stock (other
than a distribution in Common Stock) or any time the Fund repurchases Common
Stock, in each case after giving effect to such dividend, distribution or
repurchase. The liquidation value of preferred stock is expected to equal the
aggregate original purchase price plus any accrued and unpaid dividends
thereon (whether or not earned or declared). See "Description of Capital
Stock."
If the Fund leverages through borrowing or issuing short-term debt
securities, under the requirements of the 1940 Act, the value of the Fund's
total assets, less all liabilities and indebtedness of the Fund not
represented by senior securities, as defined in the 1940 Act, must at least be
equal, immediately after the issuance of senior securities consisting of debt,
to 300% of the aggregate principal amount of all outstanding senior securities
of the Fund which are debt. If the Fund leverages through the issuance of
senior securities consisting of debt, the 300% asset coverage maintenance
ratio referred to above must also be met any time the Fund declares a dividend
or other distribution on Common Stock (other than a distribution in Common
Stock) or any time the Fund repurchases Common Stock, in each case after
giving effect to such dividend, distribution or repurchase.
The Fund may enter into reverse repurchase agreements with any member
bank of the Federal Reserve System and any broker-dealer or any foreign bank
that has been determined by the Investment Manager to be creditworthy. Under a
reverse repurchase agreement, the Fund would sell securities and agree to
repurchase them at a mutually agreed date and price. At the time the Fund
enters into a reverse repurchase agreement, it will either earmark cash or
liquid securities or establish and maintain a segregated account with its
custodian or a designated sub-custodian, containing cash, securities issued or
guaranteed by the U.S. Government or its agencies and instrumentalities ("U.S.
Government Securities") or other liquid, high grade debt obligations, in each
instance having a value not less than the repurchase price (including accrued
interest). Reverse repurchase agreements involve the risk that the market
value of the securities purchased with the proceeds of the sale of securities
received by the Fund may decline below the price of the securities the Fund is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the buyer or
its trustee or receiver may receive an extension of time to determine whether
to enforce the Fund's obligations to repurchase the securities, and the Fund's
use of proceeds of the reverse repurchase agreement may effectively be
restricted pending the decision. Reverse repurchase agreements will be treated
as borrowings for purposes of calculating the Fund's borrowing limitation to
the extent that the Fund does not either earmark cash or liquid securities or
establish and maintain a segregated account (as described above).
The Fund may, in addition to engaging in the transactions described
above, borrow money from banks for temporary or emergency purposes (including,
for example, clearance of transactions, share repurchases or payments of
dividends to stockholders) in an amount not exceeding 5% of the value of the
Fund's total assets (including the amount borrowed).
Hedging
The Fund is authorized to use various hedging and investment strategies
described below to hedge various market risks (such as movements in interest
and currency exchange rates and fluctuations in the securities markets), to
manage the effective maturity or duration of debt instruments held by the Fund
or to seek to increase the Fund's income or gain. The Fund will use such
strategies to the extent deemed appropriate by the Investment Manager, in its
discretion. Limitations on the portion of the Fund's assets that may be used
in connection with the investment strategies described below are set out in
Appendix B to this Prospectus.
As part of its hedging strategies, the Fund may purchase and sell
financial futures contracts, purchase and sell (or write) exchange listed and
over-the-counter put and call options on securities,
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financial futures contracts and fixed income indices and other financial
instruments and enter into interest rate transactions and currency
transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging"). The Fund's interest rate transactions may take the
form of swaps, caps, floors and collars, and the Fund's currency transactions
may take the form of currency forward contracts, currency futures contracts,
currency swaps and options on currency or currency futures contracts.
Hedging may be used to attempt to protect against possible changes in
the market value of securities held in or to be purchased for the Fund's
portfolio resulting from securities market or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of those securities for
investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. The
ability of the Fund to utilize Hedging successfully will depend on the
Investment Manager's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select
portfolio securities. The Fund is not a "commodity pool" and Hedging involving
financial futures and options on financial futures will be purchased, sold or
entered into only for bona fide hedging, risk management or other appropriate
portfolio management purposes and not for speculative purposes. The use of
Hedging in certain circumstances will require that the Fund segregate cash,
liquid high grade debt obligations or other assets to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency.
A detailed discussion of Hedging, including applicable requirements of
the Commodity Futures Trading Commission, the requirement to segregate assets
with respect to these transactions and special risks associated with such
strategies, appears as Appendix B to this Prospectus.
The degree of the Fund's use of Hedging may be limited by certain
provisions of the Internal Revenue Code. See "Taxation."
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery
basis. Securities purchased on a when-issued or delayed delivery basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. No income accrues to the purchaser of a security on a when-issued or
delayed delivery basis prior to delivery. Such securities are recorded as an
asset and are subject to changes in value based upon changes in the general
level of interest rates. Purchasing a security on a when-issued or delayed
delivery basis can involve a risk that the market price at the time of
delivery may be lower than the agreed-upon purchase price, in which case there
could be an unrealized loss at the time of delivery. The Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities but may sell them
before the settlement date if it is deemed advisable. Except under
circumstances where a segregated account is not required under the 1940 Act or
the rules adopted thereunder, the Fund will earmark cash or liquid securities
or place them in a segregated account in each instance in an amount at least
equal in value to the Fund's commitments to purchase securities on a when-
issued or delayed delivery basis. If the value of these assets declines, the
Fund will place additional liquid assets in the account on a daily basis so
that the value of the assets in the account is equal to the amount of such
commitments. It is a current policy of the Fund not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of the Fund's
total assets less liabilities, other than the obligations created by these
commitments.
Repurchase Agreements
The Fund may enter into repurchase agreements with brokers, dealers or
banks that meet the credit guidelines adopted by the Fund's Directors. In a
repurchase agreement, the Fund buys a security from a seller that has agreed
to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. The term of these
agreements is usually from overnight to one
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week and never exceeds one year. Repurchase agreements may be viewed as a
fully collateralized loan of money by the Fund to the seller. The Fund always
receives securities as collateral with a market value at least equal to the
purchase price, including accrued interest, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Fund might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Fund's realization upon the
collateral may be delayed or limited.
Loans of Portfolio Securities
The Fund may attempt to increase its income through lending portfolio
securities to third parties and receiving interest on such loans. In the event
of the bankruptcy of the other party to a securities loan, the Fund could
experience delays in recovering the securities it loaned. To the extent that,
in the meantime, the value of the securities the Fund has loaned decreases,
the Fund could experience a loss.
The Fund may lend securities from its portfolio if liquid assets in an
amount at least equal to the current market value of the securities loaned
(including accrued interest thereon) plus the interest payable to the Fund
with respect to the loan is earmarked by the Fund or maintained by the Fund in
a segregated account. Any securities that the Fund may receive as collateral
will not become a part of its portfolio at the time of the loan and, in the
event of a default by the borrower, the Fund will, if permitted by law,
dispose of such collateral except for such part thereof that is a security in
which the Fund is permitted to invest. During the time securities are on loan,
the borrower will pay the Fund any accrued income on those securities, and the
Fund may invest the cash collateral and earn additional income or receive an
agreed-upon fee from a borrower that has delivered cash equivalent collateral.
Cash collateral received by the Fund will be invested in securities in which
the Fund is permitted to invest. The value of securities loaned will be marked
to market daily. Portfolio securities purchased with cash collateral are
subject to possible depreciation. Loans of securities by the Fund will be
subject to termination at the Fund's or the borrower's option. The Fund may
pay reasonable negotiated fees in connection with loaned securities. The Fund
does not currently intend to make loans of portfolio securities with a value
in excess of 33 1/3% of the value of its total assets.
Short Sales
The Fund may from time to time sell securities short without limitation.
A short sale is a transaction in which the Fund sells securities it does not
own (but has borrowed) in anticipation of a decline in the market price of the
securities. When the Fund makes a short sale, the proceeds it receives from
the sale will be held on behalf of a broker until the Fund replaces the
borrowed securities. To deliver the securities to the buyer, the Fund will
need to arrange through a broker to borrow the securities and, in so doing,
the Fund will become obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may be. The Fund
may have to pay a premium to borrow the securities and must pay any dividends
or interest payable on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash, U.S. Government Securities or other liquid, high grade debt
obligations. In addition, the Fund will earmark cash or liquid securities or
place them in a segregated account with its custodian, or designated sub-
custodian, in each instance in an amount equal to the difference, if any,
between (1) the market value of the securities sold at the time they were sold
short and (2) any cash, U.S. Government Securities or other liquid high grade
debt obligations deposited as collateral with the broker in connection with
the short sale (not including the proceeds of the short sale). Until it
replaces the borrowed securities, the Fund will maintain as earmarked or in
the segregated account sufficient amounts so that (1) the amount deposited in
the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will equal the current market value of the
securities sold short and (2) the amount deposited in the account plus the
amount deposited with the broker (not including the proceeds from the short
sale) will not be less than the market value of the securities at the time
they were sold short.
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Possible losses from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only the total amount
invested.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund that may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (as defined under "Investment Objectives and
Policies"). 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
will not be considered a violation of the restriction. Also, if the Fund
receives from an issuer of securities held by the Fund subscription rights to
purchase securities of that issuer, and if the Fund exercises such
subscription rights at a time when the Fund's portfolio holdings of securities
of that issuer would otherwise exceed the limits set forth below, it will not
constitute a violation if, prior to receipt of securities upon exercise of
such rights, and after announcement of such rights, the Fund has sold at least
as many securities of the same class and value as it would receive on exercise
of such rights.
As a matter of fundamental policy:
1. The Fund may not purchase any security (other than obligations of
the U.S. government or its agencies or instrumentalities) if as a
result more than 25% of the Fund's total assets would be invested
in a particular industry; provided, however, that the foregoing
restriction will not be deemed to prohibit the Fund from
purchasing the securities of any issuer pursuant to the exercise
of rights distributed to the Fund by the issuer.
2. The Fund may not make any investment for the purpose of exercising
control or management.
3. The Fund may not buy or sell commodities or commodity contracts or
real estate or interests in real estate, except that it may
purchase and sell futures contracts on stock indices and foreign
currencies, securities which are secured by real estate or
commodities, and securities of companies which invest or deal in
real estate or commodities.
4. The Fund may not make loans, except that the Fund may (i) buy and
hold debt instruments in accordance with its investment objectives
and policies, (ii) enter into repurchase agreements to the extent
permitted under applicable law, and (iii) make loans of portfolio
securities.
5. The Fund may not act as an underwriter except to the extent that,
in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under applicable securities laws.
6. The Fund may not issue senior securities or borrow money, except
for (a) preferred stock and other senior securities (including
borrowing money, including on margin if margin securities are
owned, entering into reverse repurchase agreements and entering
into similar transactions) not in excess of 33 1/3% of its total
.356 assets, and (b) borrowings up to 5% of its total assets
(including the amount borrowed) for temporary or emergency
purposes (including for clearance of transactions, repurchase of
its shares or payment of dividends), without regard to the amount
of senior securities outstanding under clause (a) above; provided,
however, that the Fund's obligations under when-issued and delayed
delivery transactions and similar transactions and reverse
repurchase agreements are not treated as senior securities if
covering assets are appropriately segregated, and the use of
hedging transactions shall not be deemed to involve the issuance
of a "senior security" or a
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"borrowing"; for purposes of clauses (a) and (b) above, the term
"total assets" shall be calculated after giving effect to the net
proceeds of senior securities issued by the Fund reduced by any
liabilities and indebtedness not constituting senior securities
except for such liabilities and indebtedness as are excluded from
treatment as senior securities by this item (6). The Fund's
obligations under interest rate swaps are not treated as senior
securities.
As a matter of operating policy, which may be changed by the Fund's Board
of Directors without stockholder vote, the Fund will not purchase securities on
margin, except such short-term credits as may be necessary for clearance of
transactions and the maintenance of margin with respect to futures contracts.
The investment restrictions set forth in items 1 to 6 above and the Fund's
investment objectives are the Fund's only fundamental policies -- i.e.,
policies that cannot be changed without the approval of a majority of the
Fund's outstanding voting securities (as defined under "Investment Objectives
and Policies" above). All other policies and restrictions described in this
Prospectus are operating policies. Unlike fundamental policies, operating
policies of the Fund may be changed by the directors of the Fund, without a
vote of the Fund's stockholders, if the directors determine such action is
warranted. The Fund will notify its stockholders of any change in any of the
operating policies set forth above. Such notice will also include a discussion
of the increased risks of investment in the Fund, if any, associated with such
a change.
MANAGEMENT OF THE FUND
The Investment Manager
The Fund employs Morgan Stanley Dean Witter Investment Management Inc.
(the "Investment Manager"), a wholly owned subsidiary of Morgan Stanley Dean
Witter & Co., pursuant to an Investment Advisory and Management Agreement,
dated as of March 13, 1997 (the "Management Agreement"), to manage the
investment and reinvestment of the assets of the Fund, subject to the
supervision of the Fund's Directors. The Investment Manager's principal
business address is 1221 Avenue of the Americas, New York, New York 10020.
The Investment Manager provides portfolio management and named fiduciary
services to various closed-end and open-end investment companies, taxable and
nontaxable institutions, international organizations and individuals investing
in United States and international equity and fixed income securities. As of
June 30, 1999, the Investment Manager and its institutional investment
management affiliates had approximately $175.3 billion of combined assets under
management as investment managers or as fiduciary advisors, of which
approximately $3.5 billion was invested in high yield securities.
Robert. E. Angevine is the senior portfolio manager for the Fund. He is a
Principal of the Investment Manager and the portfolio manager for high yield
investments. Prior to joining the Investment Manager in October 1988, Mr.
Angevine spent eight years at Prudential Insurance where he was responsible for
one of the largest open-end high yield mutual funds in the country. His other
experiences include international treasury operations at a major U.S.
pharmaceutical company and commercial banking. He received a B.A. in Economics
from Lafayette College, and an MBA from Fairleigh Dickinson University. He
served two years as a Lieutenant in the U.S. Army. Stephen F. Esser, who joined
the Investment Manager in 1996, is a Managing Director of Morgan Stanley & Co.
Incorporated, and has been a portfolio manager with Miller Anderson & Sherrerd,
LLP, an affiliate of the Investment Manager, since 1988. Gordon W. Loery, a
Principal of the Investment Manager, joined the Investment Manager as a Fixed
Income Analyst in 1990. Mr. Angevine has had primary responsibility for
managing the Fund's assets since its inception. Mr. Esser and Mr. Loery have
shared primary responsibility with Mr. Angevine for managing the Fund's assets
since April 1996 and April 1999, respectively.
36
<PAGE>
Management Agreement
Under the terms of the Management Agreement, the Investment Manager
makes investment decisions, prepares and makes available research and
statistical data, and supervises the purchase and sale of securities on behalf
of the Fund, including the selection of brokers and dealers to carry out the
transactions, all in accordance with the Fund's investment objectives and
policies, under the direction and control of the Fund's Board of Directors.
The Investment Manager also is responsible for maintaining records and
furnishing or causing to be furnished all required records or other
information of the Fund to the extent such records, reports and other
information are not maintained or furnished by the Fund's administrators,
custodians or other agents. The Investment Manager pays the salaries and
expenses of the Fund's officers and employees, as well as the fees and
expenses of the Fund's Directors, who are directors, officers or employees of
the Investment Manager or any of its affiliates, except that the Fund bears
travel expenses or an appropriate fraction thereof of officers and Directors
of the Fund who are directors, officers or employees of the Investment Manager
or its affiliates to the extent that such expenses relate to attendance at
meetings of the Fund's Board of Directors or any committee thereof.
The Fund pays all of its other expenses, including, among others,
organization expenses (but not the overhead or employee costs of the
Investment Manager); legal fees and expenses of counsel to the Fund; auditing
and accounting expenses; taxes and governmental fees; listing fees; dues and
expenses incurred in connection with membership in investment company
organizations; fees and expenses of the Fund's custodians, subcustodians,
transfer agents and registrars; fees and expenses with respect to
administration, except as may be provided otherwise pursuant to administration
agreements; expenses for portfolio pricing services by a pricing agent, if
any; expenses of preparing share certificates and other expenses in connection
with the issuance, offering and underwriting of shares issued by the Fund;
expenses relating to investor and public relations; expenses of registering or
qualifying securities of the Fund for public sale; freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions and other costs of acquiring or disposing of
any portfolio holding of the Fund; expenses of preparation and distribution of
reports, notices and dividends to stockholders; expenses of the dividend
reinvestment and cash purchase plan (except for brokerage expenses paid by
participants in such plan); costs of stationery; any litigation expenses; and
costs of stockholders' and other meetings.
For services under the Management Agreement, the Investment Manager
receives a fee, computed weekly and payable monthly, at an annual rate of
0.70% of the Fund's average weekly net assets. For the fiscal years ended
December 31, 1996, 1997 and 1998, the advisory fees earned by the Investment
Manager aggregated approximately $842,000, $929,000, and $920,000,
respectively. The Investment Manager will benefit from the Offer because the
Investment Manager's fee is based on the average weekly net assets of the
Fund. It is not possible to state precisely the amount of additional
compensation the Investment Manager 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 at the Estimated
Subscription Price of $13.25 per share, assuming the Fund issues an additional
25% of shares to satisfy over-subscription requests and after payment of
expenses the Investment Manager would receive additional annual advisory fees
of approximately $334,649 as a result of the increase in assets under
management over the Fund's current assets under management.
Under the Management Agreement, the Investment Manager is permitted to
provide investment advisory services to other clients, including clients who
may invest in high yield securities. Conversely, information furnished by
others to the Investment Manager in the course of providing services to
clients other than the Fund may be useful to the Investment Manager in
providing services to the Fund.
The Management Agreement continues in effect from year to year provided
such continuance is specifically approved at least annually by (i) a vote of a
majority of those members of the Board of Directors who are not "interested
persons" of the Investment Manager, or the Fund, cast in person at a
37
<PAGE>
meeting called for the purpose of voting on such approval, and (ii) by a
majority vote of either the Fund's Board of Directors or the Fund's
outstanding voting securities. At a meeting held on June 21, 1999, the Board
of Directors (including all Directors who are not "interested persons" of the
Investment Manager, or the Fund) unanimously approved the renewal of the
Management Agreement for a one year term expiring in June 2000. The Management
Agreement may be terminated at any time, without payment of penalty, by the
Fund's Board of Directors, by the vote of a majority of the Fund's outstanding
voting securities, or by the Investment Manager upon 60 days' written notice.
The Management Agreement will automatically terminate in the event of its
assignment, as defined under the 1940 Act.
The Management Agreement provides that the Investment Manager will not
be liable for any act or omission, error of judgment or mistake of law, or for
any loss suffered by the Fund in connection with matters to which the
Management Agreement relates, except for a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment
Manager in the performance of its duties, or from reckless disregard by it of
its obligations and duties under the Management Agreement.
Directors and Officers of the Fund
The Directors and officers of the Fund are listed below together with
their respective positions, ages and a brief statement of their principal
occupations during the past five years and, in the case of Directors, their
positions with certain international organizations and publicly held
companies.
<TABLE>
<CAPTION>
Name, Address and Principal Occupations
Date of Birth Position with Fund During Past Five Years
- ------------------------ ------------------- ---------------------------------------------
<S> <C> <C>
Barton M. Biggs* Director and Chairman, Director and Managing Director of
1221 Avenue of the Chairman of the Morgan Stanley Dean Witter Investment
Americas Board since 1995 Management Inc. and Chairman and Director of
New York, New York 10020 Morgan Stanley Dean Witter Investment
11/26/32 Management Limited; Managing Director of
Morgan Stanley & Co. Incorporated; Member of
the Yale Development Board; Director and
Chairman of the Board of various U.S.
registered investment companies managed by
Morgan Stanley Dean Witter Investment
Management Inc.
Michael F. Klein* Director and Principal of Morgan Stanley & Co.
1221 Avenue of the President since Incorporated and Morgan Stanley Dean Witter
Americas 1997 Investment Management Inc. and previously a
New York, New York 10020 Vice President thereof; Director and
12/12/58 President of various U.S. registered
investment companies managed by Morgan
Stanley Dean Witter Investment Management
Inc.; Previously practiced law with the New
York law firm of Rogers & Wells.
Peter J. Chase Director since 1995 Chairman and Chief Financial Officer, High
5 Arriba Circle Mesa Technologies, Inc.; Director of various
Santa Fe, New Mexico U.S. registered investment companies managed
87501 by Morgan Stanley Dean Witter Investment
10/12/32 Management Inc.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Principal Occupations
Date of Birth Position with Fund During Past Five Years
- ------------------------ ------------------- ---------------------------------------------
<S> <C> <C>
John W. Croghan Director since 1995 President of Lincoln Partners, a partnership
200 South Wacker Drive of Lincoln Capital Management Company;
Chicago, Illinois 60606 Director of St. Paul Bancorp, Inc., Lindsay
6/8/30 Manufacturing Co. and Republic Services;
Director of various U.S. registered
investment companies managed by Morgan
Stanley Dean Witter Investment Management
Inc.; Previously Director of Blockbuster
Entertainment Corporation.
David B. Gill Director since 1995 Director of various U.S. registered
26210 Ingleton Circle investment companies managed by Morgan
Easton, Maryland 21601 Stanley Dean Witter Investment Management
7/6/26 Inc.; Director of the Mauritius Fund Limited;
Director of Moneda Chile Fund Limited;
Director of First NIS Regional Fund SIAC;
Director of Commonwealth Africa Investment
Fund Ltd.; Chairman of the Advisory Board of
Advent Latin American Private Equity Fund;
Chairman and Director of Norinvest Bank;
Director of Surinvest International Limited;
Director of National Registry Company;
Director of South Asia Regional Fund Ltd.;
Director of Creditanstalt Ukraine; Previously
Director of Capital Markets Department of the
International Finance Corporation; Trustee,
Batterymarch Finance Management; Chairman and
Director of Equity Fund of Latin America
S.A.; Director of Commonwealth Equity Fund
Limited; and Director of Global Securities,
Inc.
Graham E. Jones Director since 1995 Senior Vice President of BGK Properties;
300 Garfield Street, Trustee of various investment companies
Suite 200 managed by Weiss, Peck & Greer; Trustee of
Santa Fe, New Mexico various investment companies managed by
87501 Morgan Grenfell Capital Management
1/31/33 Incorporated; Director of various U.S.
registered investment companies managed by
Morgan Stanley Dean Witter Investment
Management Inc.; Trustee of various
investment companies managed by Sun Capitol
Advisers, Inc.; Previously Chief Financial
Officer of Practice Management Systems, Inc.
John A. Levin Director since 1995 Chairman and Chief Executive Officer of John
One Rockefeller Plaza A. Levin & Co., Inc.; Director of various
New York, New York 10020 U.S. registered investment companies managed
8/20/38 by Morgan Stanley Dean Witter Investment
Management Inc.; Director, President and
Chief Executive Officer of Baker Fentress &
Company.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Principal Occupations
Date of Birth Position with Fund During Past Five Years
- ------------------------ ------------------- ---------------------------------------------
<S> <C> <C>
William G. Morton, Jr. Director since 1995 Chairman and Chief Executive Officer of
100 Franklin Street Boston Stock Exchange; Director of Tandy
Boston, Massachusetts Corporation; Director of various U.S.
02110 registered investment companies managed by
3/13/37 Morgan Stanley Dean Witter Investment
Management Inc.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the since 1993 Incorporated and Morgan Stanley Dean Witter
Americas Investment Management Inc.; General Counsel
New York, New York 10020 and Secretary of Morgan Stanley Dean Witter
6/10/60 Investment Management Inc.; Officer of
various U.S. registered investment companies
managed by Morgan Stanley Dean Witter
Investment Management Inc.
Joseph P. Stadler* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the since 1993 Incorporated and Morgan Stanley Dean Witter
Americas Investment Management Inc.; Officer of
New York, New York 10020 various U.S. registered investment companies
6/7/54 managed by Morgan Stanley Dean Witter
Investment Management Inc.; Previously with
Price Waterhouse LLP.
Stefanie V. Chang* Vice President Vice President of Morgan Stanley & Co.
1221 Avenue of the since 1997 Incorporated and Morgan Stanley Dean Witter
Americas Investment Management Inc.; Officer of
New York, New York 10020 various U.S. registered investment companies
11/30/66 managed by Morgan Stanley Dean Witter
Investment Management Inc.; Previously
practiced law with the New York law firm of
Rogers & Wells.
Mary E. Mullin* Secretary since Vice President of Morgan Stanley & Co.
1221 Avenue of the 1999 Incorporated and Morgan Stanley Dean Witter
Americas Investment Management Inc.; Officer of
New York, New York 10020 various U.S. registered investment companies
3/22/67 managed by Morgan Stanley Dean Witter
Investment Management Inc.; Previously
practiced law with the New York law firms of
McDermott, Will & Emery and Skadden, Arps,
Slate, Meagher & Flom LLP.
Belinda Brady Assistant Treasurer Manager, Fund Administration, Chase Global
73 Tremont Street since 1996 Funds Services Company; Officer of various
Boston, Massachusetts U.S. registered investment companies managed
02108 by Morgan Stanley Dean Witter Investment
1/23/68 Management Inc.; Previously with Price
Waterhouse LLP.
</TABLE>
- -----------
* "Interested person" within the meaning of the 1940 Act. Mr. Biggs is
chairman, director and managing director of the Investment Manager, and
Messrs. Klein, Schaaff and Stadler and Ms. Chang and Ms. Mullin are
officers of the Investment Manager.
40
<PAGE>
Pursuant to the Fund's By-Laws, the terms of office of the Directors are
staggered. The Board of Directors is divided into three classes, designated
Class I, Class II and Class III, with each class having a term of three years.
Each year the term of one class expires. Class I currently consists of Peter
J. Chase, David B. Gill and Michael F. Klein. Class II currently consists of
John W. Croghan and Graham E. Jones. Class III currently consists of Barton M.
Biggs, John A. Levin and William G. Morton, Jr.
Pursuant to the Fund's By-Laws, each Director holds office until (i) the
expiration of his term and until his successor has been elected and qualified,
(ii) his death, (iii) his resignation, (iv) December 31 of the year in which
he reaches seventy-three years of age, or (v) his removal as provided by
statute or the Articles of Incorporation.
The Board of Directors has an Audit Committee. The Audit Committee makes
recommendations to the full Board of Directors with respect to the engagement
of independent accountants and reviews with the independent accountants the
plan and results of the audit engagement and matters having a material effect
on the Fund's financial operations. The members of the Audit Committee are
currently Peter J. Chase, David B. Gill and Graham E. Jones, none of whom is
an "interested person," as defined under the 1940 Act. The Chairman of the
Audit Committee is Mr. Jones. The Board of Directors does not have nominating
or compensation committees or other committees performing similar functions.
The Fund pays each of its Directors who is not a director, officer or
employee of the Investment Manager or its affiliates an annual fee of $4,795,
plus out-of-pocket expenses. Each of the members of the Fund's Audit
Committee, which consists of the Fund's Directors who are not "interested
persons" of the Fund as defined in the 1940 Act, will receive an additional
fee of $787 for serving on such committee.
Each of the Directors who is not an "affiliated person" of the
Investment Manager within the meaning of the 1940 Act may enter into a
deferred fee arrangement (the "Fee Arrangement") with the Fund, pursuant to
which such Director may defer to a later date the receipt of his Director's
fees. The deferred fees owed by the Fund are credited to a bookkeeping account
maintained by the Fund on behalf of such Director and accrue income from and
after the date of credit in an amount equal to the amount that would have been
earned had such fees (and all income earned thereon) been invested and
reinvested either (i) in shares of the Fund or (ii) at a rate equal to the
prevailing rate applicable to 90-day United States Treasury Bills at the
beginning of each calendar quarter for which this rate is in effect, whichever
method is elected by the Director.
Under the Fee Arrangement, deferred Director's fees (including the
return accrued thereon) will become payable in cash upon such Director's
resignation from the Board of Directors in generally equal annual installments
over a period of five years (unless the Fund has agreed to a longer or shorter
payment period) beginning on the first day of the year following the year in
which such Director's resignation occurred. In the event of a Director's
death, remaining amounts payable to him under the Fee Arrangement will
thereafter be payable to his designated beneficiary; in all other events, a
Director's right to receive payments is non-transferable. Under the Fee
Arrangement, the Board of Directors of the Fund, in its sole discretion, has
reserved the right, at the request of a Director or otherwise, to accelerate
or extend the payment of amounts in the deferred fee account at any time after
the termination of such Director's service as a director. In addition, in the
event of liquidation, dissolution or winding up of the Fund or the
distribution of all or substantially all of the Fund's assets and property to
its stockholders (other than in connection with a reorganization or merger
into another fund advised by the Investment Manager), all unpaid amounts in
the deferred fee account maintained by the Fund will be paid in a lump sum to
the Directors participating in the Fee Arrangement on the effective date
thereof.
41
<PAGE>
Set forth below is a table showing the aggregate compensation paid by
the Fund to each of its Directors, as well as the total compensation paid to
each Director of the Fund by the Fund and by other U.S. registered investment
companies advised by the Investment Manager or its affiliates (collectively,
the "Fund Complex") for their services as Directors of such investment
companies for the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
Pension or
Retirement Number of
Benefits Total Funds in Fund
Accrued as Compensation Complex for
Aggregate Part of the From Fund Which
Compensation From Fund's Complex Paid to Director
Name of Directors Fund(2)(3) Expenses Directors(2)(4) Serves(5)
- ------------------------ ----------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Barton M. Biggs(1)...... $ 0 None $ 0 16
Michael F. Klein(1)..... 0 None 0 16
Peter J. Chase.......... 5,582 None 75,753 12
John W. Croghan......... 4,795 None 64,997 12
David B. Gill........... 5,582 None 75,753 12
Graham E. Jones......... 5,582 None 75,753 12
John A. Levin........... 4,795 None 72,097 13
William G. Morton, Jr .. 4,795 None 64,997 12
</TABLE>
- -----------
(1) "Interested person" of the Fund within the meaning of the 1940 Act.
(2) The amounts reflected in this table include amounts payable by the Fund
Complex for services rendered during the fiscal year ended December 31,
1998, regardless of whether such amounts were actually received by the
Directors during such fiscal year.
(3) Of the amounts shown in this column, Mr. Croghan, Mr. Gill and Mr. Levin
deferred all of their aggregate compensation pursuant to the Fee
Arrangement described above. Payments under the Fee Arrangement to a
Director will be based on the number of share equivalents a Director
holds.
(4) Of the amounts shown in this column, Mr. Croghan, Mr. Gill and Mr. Levin
deferred all or a portion of their total compensation pursuant to the
Fee Arrangement described above.
(5) Indicates the total number of boards of directors of investment
companies in the Fund Complex, including the Fund, on which the Director
served at any time during the fiscal year ended December 31, 1998.
The Articles of Incorporation of the Fund contain a provision permitted
under the Maryland General Corporation Law (the "MGCL") which by its terms
eliminates the personal liability of the Fund's directors to the Fund or its
stockholders for monetary damages for breach of fiduciary duty as a director,
subject to the requirements of the 1940 Act and certain qualifications
described below. The Articles of Incorporation and the By-Laws of the Fund
provide that the Fund will indemnify directors and officers of the Fund to the
fullest extent permitted by the MGCL, subject to the requirements of the 1940
Act. Under Maryland law, a corporation may indemnify any director or officer
made a party to any proceeding by reason of service in that capacity unless it
is established that (1) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (A) was committed in
bad faith or (B) was the result of active and deliberate dishonesty; (2) the
director or officer actually received an improper personal benefit in money,
property or services; or (3) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission
was unlawful. The Articles of Incorporation further provide that to the
fullest extent permitted by the MGCL, and subject to the requirements of the
1940 Act, no director or officer will be liable to the Fund or its
stockholders for money damages. Under Maryland law, a corporation may restrict
or limit the liability of directors or officers to the corporation or its
stockholders for money damages, except to the extent that (1) it is proved
that the person actually received an improper benefit or profit in money,
property, or services, or (2) a judgment or other final adjudication adverse
to the person is entered in a proceeding based on a finding in the proceeding
that the person's action, or failure to act, was the result of active and
deliberate dishonesty and
42
<PAGE>
was material to the cause of action adjudicated in the proceeding. Nothing in
the Articles of Incorporation or the By-Laws of the Fund protects or
indemnifies a director, officer, employee or agent against any liability to
which he would otherwise be subject by reason of acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
or protects or indemnifies a director or officer of the Fund against any
liability to the Fund or its stockholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Holdings of Common Stock
As far as is known to the Fund, no person owned beneficially five
percent or more of the outstanding shares of Common Stock of the Fund at
August 20, 1999. DTC holds of record 92.6% of the outstanding shares of Common
Stock at August 20, 1999. As far as is known to the Fund, no person other than
DTC owned of record or beneficially shares of the Fund representing more than
five percent of the voting power of the Fund's outstanding shares. The
Investment Manager beneficially owned 7,093 shares of Common Stock at August
20, 1999.
As of August 20, 1999, all Directors and officers of the Fund, owned in
the aggregate less than 1% of the Common Stock.
Administration
Under an Administration Agreement (the "Administration Agreement")
between the Fund and The Chase Manhattan Bank, it was agreed that Chase Global
Funds Services Company (the "Administrator"), an affiliate of The Chase
Manhattan Bank, will provide administrative services to the Fund. Such
administrative services include maintenance of the Fund's books and records,
calculations of NAV, preparation and filing of reports with respect to certain
of the Fund's U.S. reporting requirements, monitoring of custody arrangements
with the Fund's custodians and other accounting and general administrative
services. The Directors of the Fund will supervise and monitor the
administrative services provided by the Administrator.
The Chase Manhattan Bank, a New York State-chartered bank and trust
company, provides corporate management and administrative services to
investment companies which at December 31, 1998 had more than $176 billion of
assets under administration. The Administrator's principal business address is
73 Tremont Street, Boston, Massachusetts 02108.
Under the Administration Agreement, the Fund will pay to the
Administrator an annual administration fee of $65,000 plus .08% of the average
weekly net assets of the Fund, computed weekly and payable monthly. For the
fiscal years ended December 31, 1996, 1997 and 1998, the administration fee
earned by the Administrator aggregated approximately $176,000, $177,000 and
$176,000, respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Management Agreement authorizes the Investment Manager to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Fund and directs the Investment Manager to seek to obtain
for the Fund the most favorable net results as determined by the Fund's Board
of Directors. The Fund has authorized the Investment Manager to pay higher
commissions in recognition of brokerage services which, in the opinion of the
Investment Manager, are necessary for the achievement of better execution,
provided the Investment Manager believes this to be in the best interest of
the Fund.
In purchasing and selling securities for the Fund, it is the Fund's
policy to seek to obtain quality executions at the most favorable prices,
through responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions, consideration will be given to such factors as the
price of the security, the rate of the commission, the size and difficulty of
the order, the reliability, integrity, financial condition,
43
<PAGE>
general execution and operational capabilities of competing broker-dealers,
and the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Fund may also be appropriate for
other clients served by the Investment Manager. If purchase or sale of
securities consistent with the investment policies of the Fund and one or more
of these other clients served by the Investment Manager is considered at or
about the same time, transactions in such securities will be allocated among
the Fund and clients in a manner deemed fair and reasonable by the Investment
Manager. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Investment Manager,
and the results of such allocations, are subject to periodic review by the
Fund's Directors.
The Investment Manager on behalf of the Fund may place brokerage
transactions through brokers, including Morgan Stanley & Co. Incorporated, who
provide it with investment research services, including market and statistical
information and quotations for the Fund's portfolio valuation purposes. The
terms "investment research" and "market and statistical information and
quotations" include advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities and potential buyers or sellers of securities, as well as the
furnishing of analyses and reports concerning issuers, industries, securities,
economic factors and trends, and portfolio strategy, each and all as
consistent with those services mentioned in Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act").
Research provided to the Investment Manager in advising the Fund will be
in addition to and not in lieu of the services required to be performed by the
Investment Manager itself, and the Investment Manager's fees will not be
reduced as a result of the receipt of such supplemental information. It is the
opinion of the management of the Fund that such information is only
supplementary to the Investment Manager's own research efforts, since the
information must still be analyzed, weighed and reviewed by the Investment
Manager's staff. Such information may be useful to the Investment Manager in
providing services to clients other than the Fund, and not all such
information is necessarily used by the Investment Manager in connection with
the Fund. Conversely, information provided to the Investment Manager by
brokers and dealers through whom other clients of the Investment Manager
effect securities transactions may prove useful to the Investment Manager in
providing services to the Fund.
The Fund's Board of Directors will review at least annually the
commissions allocated by the Investment Manager on behalf of the Fund to
determine if such allocations were reasonable in relation to the benefits
inuring to the Fund.
For the fiscal years ended December 31, 1996, 1997 and 1998, the Fund
paid brokerage commissions for the execution of portfolio transactions of $0,
$0 and $100, respectively. The rate of portfolio turnover for the fiscal years
ended December 31, 1996, 1997 and 1998 was 136%, 94% and 78%, respectively.
NET ASSET VALUE
The Fund determines its NAV no less frequently than weekly, on the last
business day of each week and at such other times as the Board of Directors
may determine, by dividing the value of the net assets of the Fund (the value
of its assets less its liabilities, exclusive of capital stock and surplus,
less the liquidation value of any outstanding shares of preferred stock, which
is expected to equal the original purchase price per share plus any accrued
and unpaid dividends thereon, whether or not earned or declared) by the total
number of shares of Common Stock outstanding. In valuing the Fund's assets,
all securities for which market quotations are readily available are valued
(i) at the last sale price prior to the time of determination if there was a
sale on the date of determination, (ii) at the mean between the last current
bid and asked prices if there was no sales price on such date and bid and
asked quotations are available, and (iii) at the bid price if there was no
sales price on such date and only bid quotations are available. Publicly
traded government debt securities are typically traded on the over-the-counter
market, and will be valued at the mean between the last current bid and the
asked price as of the close of business on that market. In
44
<PAGE>
instances where a price determined above is deemed not to represent fair
market value, the value is determined in such manner as the Board of Directors
may prescribe. Bonds and other fixed income securities may be valued on the
basis of prices provided by independent pricing services when such prices are
believed to reflect the fair market value of such securities. The prices
determined by independent pricing services are determined without regard to
bid or last sales prices but take into account institutional size trading in
similar groups of securities and any developments related to the specific
securities. Short-term investments having a maturity of 60 days or less are
valued at amortized cost, unless the Board of Directors determines that such
valuation does not constitute fair value. Securities for which reliable
quotations or pricing services are not readily available and all other
securities and assets are valued at fair value as determined in good faith by,
or under procedures established by, the Board of Directors.
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
It is the Fund's present policy, which may be changed by the Board of
Directors, to distribute to stockholders, at least monthly, dividends of its
net investment income and also to distribute any net realized capital gains
annually. Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan
(the "Plan"), each stockholder may elect, by written instruction to American
Stock Transfer & Trust Company (the "Plan Agent"), to have all distributions
automatically reinvested by the Plan Agent in Fund shares pursuant to the
Plan. Stockholders who do not participate in the Plan will receive all
distributions in cash paid by check in U.S. dollars mailed directly to the
stockholder by American Stock Transfer & Trust Company, as paying agent.
Copies of dividend reinvestment forms may be obtained from the Plan Agent at
P.O. Box 922, Wall Street Station, New York, New York 10269-0560.
The Plan Agent serves as agent for the stockholders in administering the
Plan. After the Fund declares an income dividend or capital gains distribution
payable either in Common Stock or in cash, as stockholders may have elected,
nonparticipants in the Plan will receive cash and participants in the Plan
will receive Common Stock to be issued by the Fund or to be purchased in the
open market by the Plan Agent. If the market price per share on the valuation
date equals or exceeds NAV per share on that date, the Fund will issue new
shares to participants at NAV or, if the NAV is less than 95% of the market
price on the valuation date, then at 95% of the market price. The valuation
date will be the dividend or distribution payment date or, if that date is not
a trading day on the exchange on which the Common Stock is then listed, the
next preceding trading day. If NAV exceeds the market price of the Common
Stock on such valuation date, or if the Fund should declare a dividend or
distribution payable only in cash, the Plan Agent will, as agent for the
participants, buy the Common Stock in the open market with the cash in respect
of such dividend or distribution, for the participants' account on, or shortly
after, the payment date.
Participants in the Plan have the option of making additional cash
payments to the Plan Agent, monthly in any amount from $100 to $3,000, for
investment in the Common Stock. The Plan Agent will use all funds received
from participants (as well as any dividends and distributions received in
cash) to purchase Fund shares in the open market on or about the payment date
for each monthly dividend or distribution (which is expected to be
approximately the 15th day of each month). No participant will have any
authority to direct the time or price at which the Plan Agent may purchase the
Common Stock on its behalf. To avoid unnecessary cash accumulations, and also
to allow ample time for receipt and processing by the Plan Agent, it is
suggested that participants send in voluntary cash payments to be received by
the Plan Agent approximately ten days before the 15th day of each month. Any
voluntary cash payments received more than ten days prior to any such date
will be returned by the Plan Agent, and interest will not be paid on any
uninvested cash payments. A participant may withdraw a voluntary cash payment
by written notice, if the notice is received by the Plan Agent not less than
forty-eight hours before such payment is to be invested. All voluntary cash
payments should be made by check drawn on a U.S. bank (or a non-U.S. bank, if
the U.S. currency is imprinted on the check) payable in U.S. dollars and
should be
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mailed to the Plan Agent for Morgan Stanley Dean Witter High Yield Fund, Inc.,
along with a properly executed cash remittance form (copies of which will be
provided by the Plan Agent to the participants), at 40 Wall Street, New York,
New York 10005.
The Plan Agent will maintain all stockholder accounts in the Plan and
will furnish written confirmations of all transactions in the account,
including information needed by stockholders for personal and tax records.
Shares in the account of each Plan participant will be held by the Plan Agent
in non-certificated form in the name of the participant, and each
stockholder's proxy will include those shares purchased pursuant to the Plan.
In the case of stockholders, such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the stockholder as representing the total amount registered in the
stockholder's name and held for the account of beneficial owners who are
participating in the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of the
reinvestment of dividends and distributions will be paid by the Fund. However,
each participant's account will be charged 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 or distributions. A participant
will also pay brokerage commissions incurred in purchases from voluntary cash
payments made by the participant. Brokerage charges for purchasing small
amounts of stock for individual accounts through the Plan are expected to be
less than the usual brokerage charges for such transactions, because the Plan
Agent will be purchasing stock for all participants in blocks and prorating
the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not
relieve participants of any income tax which may be payable on such dividends
and distributions.
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 voluntary cash payment made and any dividend or distribution
paid subsequent to notice of the change sent to all stockholders at least 90
days before the record date for such dividend or distribution. The Plan also
may be amended or terminated by the Plan Agent by at least 90 days' written
notice to all stockholders. All correspondence concerning the Plan should be
directed to the Plan Agent for Morgan Stanley Dean Witter High Yield Fund,
Inc. at 40 Wall Street, New York, New York 10005.
TAXATION
U.S. Federal Income Taxes
The Fund has elected and qualified and intends to continue to qualify to
be treated as a regulated investment company under the Internal Revenue Code.
To so qualify, the Fund must, among other things: (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and
gains from the sale or other disposition of foreign currencies, or other
income (including gains from options, futures contracts and forward contracts)
derived with respect to the Fund's business of investing in stocks, securities
or currencies; and (b) diversify its holdings so that, at the end of each
quarter, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's total assets is invested in the securities (other than
U.S. Government securities or securities of other regulated investment
companies) of any one issuer or of any two or more issuers that the Fund
controls
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and that are determined to be engaged in the same business or similar or
related businesses. The Fund expects that all of its foreign currency gains
will be directly related to its principal business of investing in stock and
securities.
As a regulated investment company, the Fund will not be subject to U.S.
federal income tax on its investment company taxable income that it
distributes to its stockholders, provided that at least 90% of its investment
company taxable income for the taxable year is distributed to its
stockholders; however, the Fund will be subject to tax on its income and
gains, to the extent that it does not distribute to its stockholders an amount
equal to such income and gains. Investment company taxable income includes
dividends, interest and net short-term capital gains in excess of net long-
term capital losses, but does not include net long-term capital gains in
excess of net short-term capital losses. The Fund intends to distribute
annually to its stockholders substantially all of its investment company
taxable income. If necessary, the Fund intends to borrow money or liquidate
assets to make such distributions. Dividend distributions of investment
company taxable income are taxable to a U.S. stockholder as ordinary income to
the extent of the Fund's current and accumulated earnings and profits, whether
paid in cash or in shares. In general, corporate stockholders of the Fund will
be entitled to a deduction for dividends received by corporations to the
extent of the Fund's dividend income, if any, derived from its investment in
the stock of domestic corporations. The Fund will notify stockholders annually
of the amount of dividend income received from the Fund that is eligible for
the deduction for dividends received by corporations. If the Fund fails to
satisfy the 90% distribution requirement or fails to qualify as a regulated
investment company in any taxable year, it will be subject to tax in such year
on all of its taxable income, whether or not the Fund makes any distributions
to its stockholders.
As a regulated investment company, the Fund also will not be subject to
U.S. federal income tax on its net long-term capital gains in excess of net
short-term capital losses and capital loss carryovers from the prior eight
years, if any, that it distributes to its stockholders. If the Fund retains
for reinvestment or otherwise an amount of such net long-term capital gains,
it will be subject to a tax of 35% of the amount retained. The Board of
Directors of the Fund will determine at least once a year whether to
distribute any net long-term capital gains in excess of net short-term capital
losses and capital loss carryovers from prior years. Although the Fund
currently expects to distribute any net realized capital gains at least
annually, if it determines to retain any net realized capital gains, it will
designate such amounts retained as undistributed capital gains in a notice to
its stockholders who, if subject to U.S. federal income taxation on long-term
capital gains, (a) will be required to include in income for U.S. federal
income tax purposes, as long-term capital gains, their proportionate shares of
the undistributed amount, and (b) will be entitled to credit against their
U.S. federal income tax liabilities their proportionate shares of the tax paid
by the Fund on the undistributed amount and to claim refunds to the extent
that their credits exceed their liabilities. For U.S. federal income tax
purposes, the basis of shares owned by a stockholder of the Fund will be
increased by an amount equal to 65% of the amount of undistributed capital
gains included in the stockholder's income. Distributions of net long-term
capital gains, if any, by the Fund are taxable to its stockholders as long-
term capital gains whether paid in cash or in shares and regardless of how
long the stockholder has held the Fund's shares. Such distributions of net
long-term capital gains are not eligible for the dividends received deduction.
Under the Internal Revenue Code, net long-term capital gains will be taxed at
a rate no greater than 20% for individuals and 35% for corporations.
Stockholders will be notified annually as to the U.S. federal income tax
status of their dividends and distributions.
Stockholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for U.S. federal
income tax purposes as receiving a distribution in an amount equal to the
amount of money that the stockholders receiving cash dividends or
distributions will receive, and should have a cost basis in the shares equal
to such amount.
If the NAV of shares is reduced below a stockholder's cost as a result
of a distribution by the Fund, the distribution will be taxable even though
it, in effect, represents a return of invested capital. Investors
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considering buying shares just prior to a dividend or capital gain
distribution payment date should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to the record date for a distribution will
receive a distribution which will be taxable to them. The amount of capital
gains realized and distributed (which from an investment standpoint may
represent a partial return of capital rather than income) in any given year
will be the result of action taken for the best investment of the principal of
the Fund, and may therefore vary from year to year.
Under the Internal Revenue Code, the Fund may be subject to a 4% excise
tax on a portion of its undistributed income. To avoid the tax, the Fund must
distribute annually at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year and at least 98% of
its capital gain net income for the 12-month period ending, as a general rule,
on October 31 of the calendar year. For this purpose, any income or gain
retained by the Fund that is subject to corporate income tax will be treated
as having been distributed at year-end. In addition, the minimum amounts that
must be distributed in any year to avoid the excise tax will be increased or
decreased to reflect any under distribution or over distribution, as the case
may be, in the previous year. For a distribution to qualify under the
foregoing test, the distribution generally must be declared and paid during
the year. Any dividend declared by the Fund in October, November or December
of any year and payable to stockholders of record on a specified date in such
a month shall be deemed to have been received by each stockholder on December
31 of such year and to have been paid by the Fund not later than December 31
of such year, provided that such dividend is actually paid by the Fund during
January of the following year.
The Internal Revenue Service ("IRS") has taken the position in a revenue
ruling that a regulated investment company that has two or more classes of
shares must designate distributions made to each class in any year as
consisting of no more than such class's proportionate share of each type of
income for each tax year based on the total dividends distributed to each
class for such year, including income qualifying for the corporate dividends-
received deductions and net capital gains. Consequently, when both Common
Stock and preferred stock are outstanding, the Fund intends to allocate, to
the fullest extent practicable, income distributed to the classes as
consisting of particular types of income in accordance with the class's
proportionate Shares of such income. Thus, the Fund will designate dividends
qualifying for the corporate dividends-received deduction, income not
qualifying for the dividends-received deduction and net capital gain income in
a manner that allocates such income between the holders of Common Stock and
preferred stock in proportion to the total distributions made to each class
during the taxable year, or otherwise as required by applicable law.
If at any time when leverage is outstanding, the Fund does not meet the
asset coverage requirements of the 1940 Act or of any rating agency that has
rated such leverage, the Fund will be required to suspend distributions to
holders of Common Stock until the asset coverage is restored. See "Investment
Objectives and Policies -- Leverage." This may prevent the Fund from
distributing at least 90% of its investment company taxable income, and may
therefore jeopardize the Fund's qualification for taxation as a regulated
investment company or cause the Fund to incur a tax liability or a non-
deductible 4% excise tax on the undistributed taxable income (including gain),
or both. Upon any failure to meet the asset coverage requirements of the 1940
Act, or imposed by a rating agency, the Fund may, in its sole discretion,
purchase or redeem any preferred stock or short-term debt securities in order
to maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its stockholders of failing to qualify as a
regulated investment company or of incurring a tax liability or a non-
deductible 4% excise tax. There can be no assurance, however, that any such
redemption would achieve such objectives.
The Fund is likely to make investments that produce income that is not
matched by a corresponding cash distribution to the Fund, such as investments
in certain obligations having original issue discount (e.g., an amount equal
to the excess of the stated redemption price of the security at maturity over
its issue price) or market discount (e.g., an amount equal to the excess of
the stated redemption price
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of the security over the basis of such bond immediately after it was acquired)
if the Fund elects to accrue market discount on a current basis. The Fund has
elected to accrue market discount on a current basis. In addition, income may
continue to accrue for federal income tax purposes with respect to a non-
performing investment. Any such income would be treated as income earned by
the Fund and therefore would be subject to the distribution requirements of
the Internal Revenue Code. Because such income may not be matched by a
corresponding cash distribution to the Fund, the Fund may be required to
borrow money or dispose of other securities to be able to make distributions
to its investors.
The Fund will maintain accounts and calculate income by reference to the
U.S. dollar for U.S. federal income tax purposes. Certain investments may be
maintained in, and income therefrom calculated by reference to, non-U.S.
currencies, and such calculations will not necessarily correspond to the
Fund's distributable income and capital gains for U.S. federal income tax
purposes as a result of fluctuations in currency exchange rates. Furthermore,
exchange control regulations may restrict the ability of the Fund to
repatriate investment income or the proceeds of sales of securities. These
restrictions and limitations may limit the Fund's ability to make sufficient
distributions to satisfy the 90% distribution requirement and to avoid the 4%
excise tax.
The Fund's transactions in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) will be subject to special provisions of the Internal
Revenue Code that, among other things, may affect the character of gains and
losses realized by the Fund (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the Fund, defer Fund
losses, and affect the determination of whether capital gains and losses are
characterized as long-term or short-term capital gains or losses. These rules
could therefore affect the character, amount and timing of distributions to
stockholders. These provisions also may require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out) which may cause the Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to
satisfy the 90% and 98% distribution requirements for avoiding income and
excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections, and will make the appropriate entries in its books
and records when it acquires any foreign currency, option, futures contract,
forward contract, or hedged investment in order to mitigate the effect of
these rules and prevent disqualification of the Fund as a regulated investment
company and minimize the imposition of income and excise taxes.
For backup withholding purposes, the Fund may be required to withhold
31% of reportable payments (which may include dividends, capital gain
distributions, and redemptions) to certain non-corporate stockholders. A
stockholder, however, may avoid becoming subject to this requirement by filing
an appropriate form certifying under penalty of perjury that such
stockholder's taxpayer identification number is correct and that such
stockholder is not subject to backup withholding, or is exempt from backup
withholding.
Upon the sale or exchange of its shares, a stockholder will realize a
taxable gain or loss depending upon the amount realized and the stockholder's
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the stockholder's hands, and will be long-
term if the stockholder's holding period for the shares is more than 12 months
and otherwise will be short-term. Any loss realized on a sale or exchange will
be disallowed to the extent that the shares disposed of are replaced
(including replacement through the reinvesting of dividends and capital gains
distributions in the Fund) within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a stockholder on the sale of Fund shares held by the
stockholder for six months or less will be treated for federal income tax
purposes as a long-term capital loss to the extent of any distributions of
long-term capital gains received by the stockholder with respect to such
shares.
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An amount received by a stockholder from the Fund in exchange for shares
of the Fund (pursuant to a repurchase of shares in a tender offer or
otherwise) generally will be treated as a payment in exchange for the shares
tendered, which may result in taxable gain or loss as described above.
However, if the amount received by a stockholder exceeds the fair market value
of the shares tendered, or if a stockholder does not tender all of the shares
of the Fund owned or deemed to be owned by the stockholder, all or a portion
of the amount received may be treated as a dividend taxable as ordinary income
or as a return of capital. In addition, if a tender offer is made, any
stockholders who do not tender their shares could be deemed, under certain
circumstances, to have received a taxable distribution as a result of their
increased proportionate interest in the Fund.
Foreign Stockholders
Taxation of a stockholder who, as to the United States, is a non-
resident alien individual, foreign trust or estate, foreign corporation or
foreign partnership ("foreign stockholder") depends, in part, on whether the
stockholder's income from the Fund is "effectively connected" with a U.S.
trade or business carried on by the stockholder. If a stockholder is a
resident alien or if dividends or distributions from the Fund are effectively
connected with a U.S. trade or business carried on by a foreign stockholder,
then dividends of net investment income, distributions of net capital gains
and gain realized upon the sale of shares of the Fund will be subject to U.S.
income tax at the rates applicable to U.S. citizens or domestic corporations.
If the income from an investment in shares of the Fund is effectively
connected with a U.S. trade or business carried on by a foreign stockholder
that is a corporation, then such stockholder also may be subject to the 30%
branch profits tax.
If the income from the Fund is not effectively connected with a U.S.
trade or business carried on by the foreign stockholder, (i) dividends of net
investment income will be subject to a 30% (or lower treaty rate) U.S. federal
withholding tax, and (ii) distributions of net capital gains and gains
realized upon the sale of shares of the Fund will not be subject to U.S.
federal tax as long as such foreign stockholder is not a non-resident alien
individual who was physically present in the United States for more than 182
days during the taxable year and certain other conditions are satisfied.
However, certain foreign stockholders may nonetheless be subject to 31% backup
withholding on distributions of net capital gains and gross proceeds paid to
them upon the sale of their shares of the Fund. See "Taxation -- U.S. Federal
Income Taxes."
The tax consequences to a foreign stockholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Stockholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their own tax advisers with respect
to (a) whether their income from the Fund is or is not effectively connected
with a United States trade or business carried on by them, (b) whether they
may claim the benefits of an applicable tax treaty and (c) any other tax
consequences to them of an investment in the Fund.
Notices
Stockholders will be notified annually by the Fund as to the United
States federal income tax status of the dividends, distributions and deemed
distributions made by the Fund to its stockholders. Furthermore, stockholders
will be sent, if appropriate, various written notices after the close of the
Fund's taxable year as to the United States federal income tax status of
certain dividends, distributions and deemed distributions that were paid (or
that were treated as having been paid) by the Fund to its stockholders during
the preceding taxable year.
Other Taxation
Distributions also may be subject to state, local and foreign taxes
depending on each stockholder's particular position.
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THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY
INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL
NATURE OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT HIS OWN TAX
ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF PARTICIPATION
IN THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF STATE LOCAL, FOREIGN,
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX
LAWS.
DESCRIPTION OF CAPITAL STOCK
Common Stock
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock ($0.01 par value). As of the date of this Prospectus, 8,848,421 shares
of Common Stock are outstanding. Shares of the Fund, when issued, will be
fully paid and nonassessable and will have no conversion, preemptive or other
subscription rights. Holders of Common Stock are entitled to one vote per
share on all matters to be voted upon by stockholders and are not able to
cumulate their votes in the election of Directors. Thus, holders of more than
50% of the shares voting for the election of directors have the power to elect
100% of the directors.
All shares of Common Stock are equal as to assets, earnings and the
receipt of dividends, if any, as may be declared by the Board of Directors out
of funds available therefor, however, the Fund's Board of Directors has the
authority to classify and reclassify any authorized but unissued shares of
capital stock and to establish the rights and preferences of any such
reclassified shares. See "Description of Capital Stock -- Preferred Stock." In
the event of liquidation, dissolution or winding up of the Fund, each share of
Common Stock is entitled to receive its proportion of the Fund's assets
remaining after payment of all debts and expenses, including any preferential
liquidating distribution to holders of any preferred stock issued by the Fund.
The Fund commenced operations on November 30, 1993 following the
issuance of 7,093 shares of Common Stock to the Investment Manager on November
17, 1993 for $100,000 and the initial public offering and over-allotment on
November 23, 1993 and December 23, 1993 of 8,700,356 shares to the public
resulting in aggregate net proceeds to the Fund of approximately $122,220,020.
As of August 20, 1999, the net assets of the Fund were $115,277,198.
Following the expiration of the Offer, depending upon market conditions,
the Fund may offer additional shares of Common Stock in a secondary offering
at prices not less than the NAV of the Fund's shares at the time of such
offer. Furthermore, additional shares may be issued under the Plan. Other
offerings of the Fund's shares will require approval of the Fund's Board of
Directors and may require stockholder approval. Any such additional offerings
would also be subject to the requirements of the 1940 Act, including the
requirement that shares may not be sold at a price below the then current NAV
(exclusive of underwriting discounts and commissions) except in connection
with an offering to existing stockholders or with the consent of a majority of
the Fund's shares.
The Fund is a closed-end investment company and as such its stockholders
do not have the right to cause the Fund to redeem their shares of Common
Stock. The Fund, however, may repurchase shares of Common Stock from time to
time in the open market or in private transactions when it can do so at prices
at or below the current NAV per share on terms that represent a favorable
investment opportunity. Subject to its investment limitations, the Fund may
borrow to finance the repurchase of shares. However, the payment of interest
on such borrowings will increase the Fund's expenses and consequently reduce
net income. In addition, the Fund is required under the 1940 Act to maintain
"asset coverage" of not less than 300% of its "senior securities representing
indebtedness" as such terms are defined in the 1940 Act.
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The Fund's shares of Common Stock will trade in the open market at a
price which is a function of several factors, including their NAV and yield.
The shares of closed-end investment companies frequently sell at a discount
from, but sometimes at a premium over, their NAVs. See "Risk Factors and
Special Considerations." There can be no assurance that it will be possible
for investors to resell shares of the Fund at or above the price at which
shares are offered by this Prospectus or that the market price of the Fund's
shares will equal or exceed NAV. Since the Fund may repurchase its shares at
prices below their NAV or make a tender offer for its shares, the NAV of those
shares that remain outstanding will be increased, but the effect of such
repurchases on the market price of the remaining shares cannot be predicted.
Any offer by the Fund to repurchase shares will be made at a price based
upon the NAV of the shares at the close of business on or within 14 days after
the last date of the offer. Each offer will be made and stockholders notified
in accordance with the requirements of the 1934 Act and the 1940 Act, either
by publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. When a repurchase offer is authorized by the Fund's
Board of Directors, a stockholder wishing to accept the offer may be required
to offer to sell all (but not less than all) of the shares owned by such
stockholder (or attributed to him for federal income tax purposes under
Section 318 of the Internal Revenue Code). The Fund will purchase all shares
tendered in accordance with the terms of the offer unless it determines to
accept none of them (based upon one of the conditions set forth below).
Persons tendering shares may be required to pay a service charge to help
defray certain costs of the transfer agent. Any such service charges will not
be deducted from the consideration paid for the tendered shares. During the
period of a repurchase offer, the Fund's stockholders will be able to
determine the Fund's current net asset value (which will be calculated weekly)
by use of a toll-free telephone number.
The Fund's Articles of Incorporation and By-Laws include provisions that
could limit the ability of others to acquire control of the Fund, to modify
the structure of the Fund or to cause it to engage in certain transactions.
These provisions, described below, also could have the effect of depriving
stockholders 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. In the opinion
of the Fund, however, these provisions offer several possible advantages. They
potentially require persons seeking control of the Fund to negotiate with its
management regarding the price to be paid for the shares required to obtain
such control, they promote continuity and stability and they enhance the
Fund's ability to pursue long-term strategies that are consistent with its
investment objective.
The Fund's Articles of Incorporation provide that the Fund's Board of
Directors have the sole power to adopt, alter or repeal the Fund's By-Laws. In
addition, the Directors are divided into three classes, each having a term of
three years, with the term of one class expiring each year. In addition, a
Director may be removed from office only with cause and only by a majority of
the Fund's stockholders. The affirmative vote of 75% or more of the Fund's
outstanding shares is required to amend, alter or repeal the provisions in the
Fund's Articles of Incorporation relating to amendments to the Fund's By-Laws
and to removal of Directors. See "Management of the Fund -- Directors and
Officers of the Fund." These provisions could, among other things, delay the
replacement of a majority of the Directors and have the effect of making
changes in the Board of Directors more difficult than if such provisions were
not in place.
The affirmative vote of the holders of 75% or more of the outstanding
shares is required to (1) convert the Fund from a closed-end to an open-end
investment company, (2) merge or consolidate with any other entity or enter
into a share exchange transaction in which the Fund is not the successor
corporation, (3) dissolve or liquidate the Fund, (4) sell all or substantially
all of its assets, (5) cease to be an investment company registered under the
1940 Act, (6) issue to any person securities in exchange for property worth
$1,000,000 or more, exclusive of sales of securities in connection with a
public offering, issuance of securities pursuant to a dividend reinvestment
plan or other stock dividend or issuance of securities upon the exercise of
any stock subscription rights, or (7) amend, alter or repeal the above
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provisions in the Fund's Articles of Incorporation. However, if such action
has been approved or authorized by the affirmative vote of at least 70% of the
entire Board of Directors, the affirmative vote of only a majority of the
outstanding shares would be required for approval, except in the case of the
issuance of securities, in which no stockholder vote would be required unless
otherwise required by applicable law. The principal purpose of the above
provisions is to increase the Fund's ability to resist takeover attempts and
attempts to change the fundamental nature of the business of the Fund that are
not supported by either the Board of Directors or a large majority of the
stockholders. These provisions make it more difficult to liquidate, take over
or open-end the Fund and thereby are intended to discourage investors from
purchasing its shares with the hope of making a quick profit by forcing the
Fund to change its structure. These provisions, however, would apply to all
actions proposed by anyone, including management, and would make changes in
the Fund's structure accomplished through a transaction covered by the
provisions more difficult to achieve. The foregoing provisions also could
impede or prevent transactions in which holders of shares of Common Stock
might obtain prices for their shares in excess of the market prices at which
the Fund's shares were then trading. Although these provisions could have the
effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund, the Fund believes the conversion of the
Fund from a closed-end to an open-end investment company to eliminate the
discount may not be desired by stockholders, who purchased their Common Stock
in preference to stock of the many mutual funds available.
The Fund is required by the rules of the NYSE to hold annual meetings of
stockholders. The most recent annual meeting of stockholders was held on June
21, 1999. The next annual meeting of stockholders is scheduled for June 2000.
Under Maryland law and the Fund's By-Laws, the Fund will call a special
meeting of its stockholders upon the written request of stockholders entitled
to cast at least 25% of all the votes at such meeting. Such request for such a
special meeting must state the purpose of the meeting and the matters proposed
to be acted on at it. The secretary of the Fund shall (i) inform the
stockholders who make the request of the reasonably estimated cost of
preparing and mailing a notice of the meeting, and (ii) on payment of these
costs to the Fund notify each stockholder entitled to notice of the meeting.
Notwithstanding the above, under Maryland law and the Fund's By-Laws, unless
requested by stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at
any special meeting of the stockholders held during the preceding 12 months.
Preferred Stock
The Fund's Articles of Incorporation provide that the Board of Directors
may classify or reclassify any unissued shares of capital stock into one or
more additional or other classes or series, with rights as determined by the
Board of Directors, by action by the Board of Directors without the approval
of the holders of Common Stock. Holders of Common Stock have no preemptive
right to purchase any shares of preferred stock that might be issued.
Although the terms of any preferred stock, including its dividend rate,
liquidation preference and redemption provisions will be determined by the
Board of Directors (subject to applicable law and the Fund's Articles of
Incorporation), it is likely that the preferred stock will be structured to
carry a relatively short-term dividend rate reflecting interest rates on
short-term debt securities, by providing for the periodic redetermination of
the dividend rate at relatively short intervals through an auction,
remarketing or other procedure. Although no shares of preferred stock are
currently authorized, the Fund believes that it is likely that the liquidation
preference, voting rights and redemption provisions of the preferred stock
will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
stock will be entitled to receive a preferential liquidating
53
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distribution (expected to equal the original purchase price per share plus
accrued and unpaid dividends, whether or not declared) before any distribution
of assets is made to holders of Common Stock. After payment of the full amount
of the liquidating distribution to which they are entitled, the preferred
stockholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any corporation or corporations, a share exchange transaction or a
sale of all or substantially all other assets of the Fund will not be deemed
to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. The 1940 Act requires that the holders of any preferred
stock, voting separately as a single class, have the right to elect at least
two directors at all times and, subject to the prior rights, if any, of the
holders of any other class of senior securities outstanding, to elect a
majority of the directors at any time two years' dividends on any preferred
shares are unpaid. The 1940 Act also requires that, in addition to any
approval by stockholders that might otherwise be required, the approval of the
holders of a majority of any outstanding preferred shares, voting separately
as a class, would be required to (a) adopt any plan of reorganization that
would adversely affect the preferred shares and (b) take any action requiring
a vote of security holders pursuant to Section 13(a) of the 1940 Act,
including, among other things, changes in the Fund's classification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Common Stock" above concerning voting requirements for
conversion of the Fund to an open-end investment company and other matters. In
addition, in the discretion of the Board of Directors, subject to the 1940
Act, the terms of any preferred stock may also require the affirmative vote of
up to 75% of the preferred stock, voting separately as a class, for approval
of certain transactions involving a merger or sale of assets or conversion of
the Fund to open-end status and other matters. The Board of Directors
presently intends that, except for the matters discussed in the previous
sentence and except as otherwise indicated in this Prospectus and as otherwise
required by applicable law, holders of shares of preferred stock will have
equal voting rights with holders of Common Stock (one vote per share, unless
otherwise required by the 1940 Act), and will vote together with holders of
Common Stock as a single class.
It is presently intended that with respect to the election of the Fund's
directors, on and after issuance of any preferred stock the holders of all
outstanding shares of preferred stock, voting as a separate class, would be,
entitled to elect two directors of the Fund, and the remaining directors would
be elected by holders of Common Stock and preferred stock, voting together as
a single class. The Fund's By-laws currently provide that the Board of
Directors will consist of not more than 14 directors and not less than such
number of directors as permitted under Maryland law, as may be determined from
time to time by vote of a majority of directors then in office.
It is presently intended that the affirmative vote of the holders of a
majority of the outstanding shares of preferred stock, voting as a separate
class, will be required to amend, alter or repeal any of the preferences,
rights or powers of holders of shares of preferred stock so as to affect
materially and adversely such preferences, rights, or powers, or increase or
decrease the number of shares of preferred stock. The class vote of holders of
preferred stock described above will in each case be in addition to any other
vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Stock by the Fund. It is
currently contemplated that the terms of any preferred stock that is issued
will provide that it is redeemable by the Fund in whole or in part at the
original purchase price per share plus accrued dividends per share, that the
Fund may tender for or purchase shares of preferred stock and that the Fund
may subsequently resell any shares so tendered or repurchased. Any redemption
or purchase of shares of preferred stock by the Fund will reduce the leverage
applicable to shares of Common Stock, while any resale of preferred stock by
the Fund will increase such leverage. See "Investment Objectives and
Policies -- Leverage."
54
<PAGE>
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company acts as the Fund's dividend
paying agent, transfer agent and the registrar for the Fund's Common Stock.
The principal business address of American Stock Transfer & Trust Company is
40 Wall Street, New York, New York 10005.
CUSTODIANS
The Chase Manhattan Bank (the "U.S. Custodian") acts as the custodian
for the Fund's assets held in the United States. The principal business
address of the U.S. Custodian is 3 Chase Metrotech Center, Brooklyn, New York
11245.
Under a custody agreement between United States Trust Company of New
York (succeeded to by the U.S. Custodian) and the Fund (the "Domestic Custody
Agreement"), the U.S. Custodian has agreed to hold all property of the Fund,
delivered to it, in safekeeping in a segregated account (except that the U.S.
Custodian may commingle such property with other assets held by the U.S.
Custodian in a fiduciary or custodian capacity), make payments of cash from
the Fund's accounts for the purchase of securities for the Fund, endorse and
collect all checks, drafts or other orders for payment of money received as
custodian for the Fund, daily furnish the Fund with confirmations and a
summary of all transfers to or from the account, collect and receive for the
account of the Fund all income and other payments and distributions, and
prepare and maintain the books and records of the Fund as required by the 1940
Act, other applicable federal or state laws, rules or regulations, or any
federal or state regulatory body.
For its services the U.S. Custodian receives a fee calculated based on
the average daily net assets of the Fund, computed and payable monthly, plus
an amount for each transaction effected in the Fund's account. In addition,
the U.S. Custodian will be reimbursed by the Fund for any out-of-pocket
expenses incurred by it in connection with the performance of its duties under
the Domestic Custody Agreement.
The Chase Manhattan Bank (which succeeded Morgan Stanley Trust Company)
also acts as the custodian for the Fund's assets held outside the United
States (the "International Custodian").
Under a custody agreement between the International Custodian and the
Fund (the "International Custody Agreement"), the International Custodian has
agreed to hold all property of the Fund, delivered to it, in safekeeping in a
segregated account, receive and collect all income and transaction proceeds
with respect to such property, accept and deliver securities on the purchase,
sale, redemption, exchange or conversion thereof, pay from the Fund's account
the purchase price of any securities acquired by the Fund, as well as any
taxes and other expenses payable in connection with securities transactions,
maintain all necessary books and records with respect to the property of the
Fund held by it, provide the Fund with periodic reports regarding the Fund's
account and, in general, attend to all nondiscretionary details in connection
with the sale, purchase, transfer and other dealings with the securities and
other property of the Fund held by the International Custodian.
For its services the International Custodian receives a fee calculated
as a percentage of Fund assets in its custody, plus an amount for each
transaction effected in the Fund's account. In addition, the International
Custodian will be reimbursed by the Fund for any out-of-pocket expenses
incurred by it in connection with the performance of its duties under the
International Custody Agreement.
The International Custodian may employ one or more sub-custodians
outside the United States that are approved by the Board of Directors in
accordance with regulations under the 1940 Act. The fees and expenses of any
such sub-custodian will be paid by the International Custodian.
55
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EXPERTS
The December 31, 1998 financial statements of the Fund have been
incorporated by reference herein in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. The business address of
PricewaterhouseCoopers LLP is 1177 Avenue of the Americas, New York, New York
10036.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for
the Fund by Rogers & Wells LLP, New York, New York, and by its special
Maryland counsel, Piper & Marbury L.L.P., Baltimore, Maryland.
ADDITIONAL INFORMATION
On occasion, the Fund may compare its performance to performance or
market data published or compiled by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, CS First Boston or other industry publications. As with other
performance data, performance comparisons should not be considered indicative
of the Fund's relative performance for any future period. In connection with
the Offer, the Fund provides current information as to performance,
distributions, yields, current strategy and market outlook, industry
allocation, credit quality distribution, asset allocation and the Fund's top
ten holdings through its toll free number at 1-800-221-6726.
The Fund has filed with the SEC in Washington, D.C. a registration
statement under the Securities Act, relating to the Shares offered by this
Prospectus. Further information concerning these Shares and the Fund may be
found in that registration statement on file with the SEC, of which this
Prospectus constitutes a part. The Fund also files reports and other
information with the SEC. The registration statements and these reports and
other information can be inspected, without charge, and copied, for a fee, at
the public reference facilities maintained by the SEC at 450 5th Street, N.W.,
Washington, D.C. 20549. The Fund's filings are also available to the public on
the SEC's internet site (http://www.sec.gov). The reports and other
information concerning the Fund may also be inspected at the offices of the
NYSE.
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APPENDIX A
RATINGS
A description of the rating policies of Moody's and S&P with respect to
bonds and debentures appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected
by a large or by an exceptionally stable margin, and principal is secure.
While the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment qualities
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 rated Baa are considered as medium grade
obligations, e.g., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance and 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 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.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. 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-1
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Standard & Poor's Corporate Bond Ratings
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and
pay interest.
AA - Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differ from AAA
issues only in small degree.
A - Bonds rated A have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead a weakened capacity to repay principal and pay
interest for bonds in this category than for higher rated categories.
BB-B-CCC-CC-C - Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
D - Bonds rated D are in default. The D category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The D rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1 - Issuers (or related supporting institutions) rated Prime-1
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 structures with
moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 - Issuers (or related supporting institutions) rated Prime-2
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, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
Prime-3 - Issuers (or related supporting institutions) rated Prime-3
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 the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime
rating categories.
A-2
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Standard & Poor's Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365
days. Ratings are graded into several categories, ranging from "A-l" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payments is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-l".
A-3 - Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B - Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
A-3
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<PAGE>
APPENDIX B
DESCRIPTION OF VARIOUS FOREIGN CURRENCY HEDGES
AND STOCK OPTIONS AND FUTURES CONTRACTS
Foreign Currency Hedging Transactions
Forward Foreign Currency Exchange Contract. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks).
Foreign Currency Futures Contracts. A foreign currency futures contract
is a standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are traded on
regulated exchanges. Parties to a futures contract must make initial "margin"
deposits, which generally range from 2% to 5% of the contract price, to secure
performance of the contract. There also are requirements to make "variation'
margin deposits as the value of the futures contract fluctuates. The Fund may
not enter into foreign currency futures contracts if the aggregate amount of
initial margin deposits on the Fund's futures positions, including stock index
futures contracts (which are discussed below), would exceed 5% of the value of
the Fund's total assets. The Fund also will be required to segregate assets to
cover its futures contracts obligations.
At the maturity of a forward of futures contract, the Fund may either
accept or make delivery of the currency specified in the contract or, prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract. Closing purchase transactions with respect
to futures contracts are effected on an exchange. The Fund will only enter
into such a forward or futures contract if it is expected that there will be a
liquid market in which to close out such contract. There can, however, be no
assurance that such a liquid market will exist in which to close a forward or
futures contract, in which case the Fund may suffer a loss.
Currency Hedging Strategies. The Fund may enter into forward foreign
currency exchange contracts and foreign currency futures contracts in several
circumstances. For example, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Fund anticipates the receipt in a foreign currency of dividends or interest
payments on such a security which it holds, the Fund may desire to "lock in"
the dollar price of the security or the dollar equivalent of such dividend or
interest payment, as the case may be. In addition, when the Investment Manager
believes that the currency of a particular foreign country may suffer a
substantial decline against the dollar, it may enter into a forward or futures
contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency.
The Fund does not intend to enter into such forward or futures contracts
to protect the value of its portfolio securities on a regular basis, and will
not do so if, as a result, the Fund will have more than 20% of the value of
its total assets committed to the consummation of such contracts. The Fund
also will not enter into such forward or futures contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. Further, the Fund generally will not enter into a forward or futures
contract with a term of greater than one year.
B-1
<PAGE>
Options on Currencies. The Fund may attempt to accomplish objectives
similar to those described above with respect to forward and futures contracts
for currency by means of purchasing put or call options on foreign currencies
on exchanges. A put option gives the Fund the right to sell a currency at the
exercise price until the expiration of the option. A call option gives the
Fund the right to purchase a currency at the exercise price until the
expiration of the option.
While the Fund may enter into forward, futures and options contracts to
reduce currency exchange rate risks, changes in currency prices may result in
a poorer overall performance for the Fund than if it had not engaged in any
such transaction. Moreover, there may be an imperfect correlation between the
Fund's portfolio holdings of securities denominated in a particular currency
and forward, futures or options contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge
or expose the Fund to risk of foreign exchange loss.
Certain provisions of the Internal Revenue Code may limit the extent to
which the Fund may enter into forward or futures contracts or engage in
options transactions. These transactions may also affect the character and
timing of income and the amount of gain or loss recognized by the Fund and its
stockholders for U.S. federal income tax purposes. See "Taxation -- U.S.
Federal Income Taxes."
Options on Securities and Securities Index Futures Contracts
Options on Securities. In order to hedge against market shifts, the Fund
may purchase put and call options on securities. In addition, the Fund may
seek to increase its income or may hedge a portion of its portfolio
investments through writing (e.g., selling) covered call options. A put option
gives the holder the right to sell to the writer of the option an underlying
security at a specified price at any time during or at the end of the option
period. In contrast, a call option gives the purchaser the right to buy the
underlying security covered by the option from the writer of the option at the
stated exercise price. A "covered" call option means that so long as the Fund
is obligated as the writer of the option, it will own (i) the underlying
securities subject to the option, or (ii) securities convertible or
exchangeable without the payment of any consideration in to the securities
subject to the option.
The Fund will receive a premium from writing call options, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. By writing a call, the Fund
will limit its opportunity to profit from an increase in the market value of
the underlying security above the exercise price of the option for as long as
the Fund's obligation as writer of the option continues. Thus, in some periods
the Fund will receive less total return and in other periods greater total
return from writing covered call options than it would have received from its
underlying securities had it not written call options.
The Fund may purchase options on securities that are listed on
securities exchanges or traded over the counter. The staff of the SEC
considers over the counter options and assets used to cover such options
generally illiquid. In purchasing a put option, the Fund will seek to benefit
from a decline in the market price of the underlying security, while in
purchasing a call option, the Fund will seek to benefit from an increase in
the market price of the underlying security. If an option purchased is not
sold or exercised when it has remaining value, or if the market price of the
underlying security remains equal to or greater than the exercise price, in
the case of a put, or remains equal to or below the exercise price, in the
case of a call, during the life of the option, the Fund will lose its
investment in the option. For the purchase of an option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price, in the case of a put, and must increase sufficiently above the
exercise price, in the case of a call, to cover the premium and transaction
costs. Because premiums paid by the Fund on options are small in relation to
the market value of the investments underlying the options, buying options can
result in large amounts of leverage. The leverage offered by trading in
options could cause the Fund's net asset value to be subject to more frequent
and wider fluctuation than would be the case if the Fund did not invest in
options.
B-2
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Securities Index Futures Contracts. The Fund may purchase and sell
indexed financial futures contracts. An index futures contract is an agreement
to take or make delivery of an amount of cash equal to the difference between
the value of the index at the beginning and at the end of the contract period.
Successful use of index futures will be subject to the Investment Manager's
ability to predict correctly movements in the direction of the relevant debt
market. No assurance can be given that the Investment Manager's judgment in
this respect will be correct.
The Fund may sell indexed financial futures contracts in anticipation of
or during a market decline to attempt to offset the decrease in market value
of equity securities in its portfolio that might otherwise result. When the
Fund is not fully invested in high yield securities and anticipates a
significant market advance, it may purchase index futures in order to gain
rapid market exposure that may in part or entirely offset increases in the
cost of securities that it intends to purchase. In a substantial majority of
these transactions, the Fund will purchase such securities upon termination of
a futures position, but, under unusual market conditions, a futures position
may be terminated without the corresponding purchase of debt securities.
B-3
<PAGE>
Morgan Stanley Dean Witter High Yield Fund, Inc.
