-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MRu6SFGwJoxyovvm+WK5K3B7m7E9hOp77J2rsvmONk2blwAvG+71MuL0jdmMwdV6 X6YCcgMUlJEA6tMJq/Ax6g== 0000950146-98-001264.txt : 19980803 0000950146-98-001264.hdr.sgml : 19980803 ACCESSION NUMBER: 0000950146-98-001264 CONFORMED SUBMISSION TYPE: 486BPOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980730 EFFECTIVENESS DATE: 19980730 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DLJ HIGH YIELD BOND FUND CENTRAL INDEX KEY: 0001061353 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 486BPOS SEC ACT: SEC FILE NUMBER: 333-52373 FILM NUMBER: 98674366 BUSINESS ADDRESS: STREET 1: 277 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10172 BUSINESS PHONE: 2128926692 MAIL ADDRESS: STREET 1: 277 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10172 486BPOS 1 POST-EFFECTIVE AMENDMENT NO. 1 As filed with the Securities and Exchange Commission on July 30, 1998. File Nos. 333-52373 811-8777 U.S. Securities and Exchange Commission Washington, D.C. 20549 Post-Effective Amendment No. 1 to FORM N-2 (Check appropriate box or boxes) |_| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_| Pre-Effective Amendment No. ___ |X| Post-Effective Amendment No. 1 and/or |_| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X| Amendment No. 3 DLJ High Yield Bond Fund (Exact Name of Registrant as Specified in Declaration of Trust) 277 Park Avenue, New York, New York 10172 (Address of Principal Executive Offices) 1-888-520-3615 (Registrant's Telephone Number, including Area Code) G. Moffett Cochran Chairman DLJ Asset Management Group 277 Park Avenue New York, New York 10172 (Name and Address of Agent for Service) -------------------- Copies To: Pierre de Saint Phalle, Esq. Sharon Spodak, Esq. Philip H. Harris, Esq. Davis Polk & Wardwell General Counsel Skadden, Arps, Slate, Meagher & Flom LLP 450 Lexington Avenue DLJ Asset Management Group 919 Third Avenue New York, New York 10017 277 Park Avenue New York, New York 10022 New York, New York 10172
-------------------- If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. |_| It is proposed that this filing will become effective (check appropriate box) |_| when declared effective pursuant to section 8(c) |X| immediately upon filing pursuant to paragraph (b) |_| on (date) pursuant to paragraph (b) |_| 60 days after filing pursuant to paragraph (a) |_| on (date) pursuant to paragraph (a) If appropriate, check the following box: |_| this [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement]. |_| This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is - ______. DLJ High Yield Bond Fund Cross Reference Sheet Pursuant to Rule 404(C) Under the Securities Act of 1933
Item Number, Form N-2 Location in Prospectus - ----------- ---------------------- PART A 1. Outside Front Cover...........................Outside Front Cover 2. Inside Front and Outside Back Cover Page..............................Inside Front and Outside Back Cover Page 3. Fee Table and Synopsis........................Prospectus Summary; Fee Table 4. Financial Highlights..........................Not Applicable 5. Plan of Distribution..........................Cover Page; Prospectus Summary; Underwriting 6. Selling Shareholders..........................Not Applicable 7. Use of Proceeds...............................Front Cover Pages; Prospectus Summary; Use of Proceeds; Investment Restrictions 8. General Description of the Registrant..............................Front Cover Pages; Prospectus Summary; The Fund; Investment Objectives and Policies; Other Investment Prac tices; Risk Factors and Special Considerations; Investment Restrictions; Portfolio Transactions; Determination of Net Asset Value; Dividends and Other Distributions; Taxes 9. Management....................................Inside Front Cover; Prospectus Summary; Management of the Fund; Trustees and Officers of the Fund; Portfolio Transac tions 10. Capital Stock, Long-term Debt, and Other Securities ...................Prospectus Summary; Dividends and Other Distributions; Taxes; Automatic Dividend Reinvestment Plan 11. Defaults and Arrears on Senior Securities..............................Not Applicable 12. Legal Proceedings.............................Not Applicable 13. Table of Contents of the Statement of Additional Information...............Not Applicable PART B 14. Cover Page....................................Not Applicable 15. Table of Contents.............................Not Applicable 16. General Information and History ..............Not Applicable 17. Investment Objectives and Policies................................Front Cover Pages; Prospectus Summary; Investment Objectives and Policies; Other Investment Practices; Risk Factors and Special Considerations; Investment Restrictions 18. Management....................................Management of the Fund; Trustees and Officers of the Fund 19. Control Persons and Principal Holders of Securities...................Trustees and Officers of the Fund 20. Investment Advisory and Other Services..........................Prospectus Summary; Trustees and Officers of the Fund; Management of the Fund; Portfolio Transactions 21. Brokerage Allocation and Other Practices...............................Portfolio Transactions 22. Tax Status....................................Dividends and Other Distributions; Taxes; Report of Independent Auditors 23. Financial Statements..........................Statement of Assets, Liabilities and Capital
PART C The information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. PROSPECTUS July 28, 1998 40,000,000 Shares DLJ High Yield Bond Fund Common Shares DLJ High Yield Bond Fund (the "Fund") is a newly organized, non-diversified, closed-end management investment company. The Fund's primary investment objective is to seek high current income. The Fund may, and in certain market conditions will, seek to maximize return through opportunistic investment in smaller high yield issues. The Fund will also seek capital appreciation as a secondary objective to the extent consistent with its objective of seeking high current income. Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's Investors Service, Inc. or lower than BBB by Standard & Poor's Ratings Group or comparably rated by another nationally recognized rating agency) or in unrated income securities that DLJ Investment Management Corp. ("DLJIM"), the Fund's investment manager, determines to be of comparable quality. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies or multinational foreign currency units. There can be no assurance that the Fund will achieve its objectives. Investments in lower grade securities are subject to special risks, including greater price volatility and a greater risk of loss of principal and non-payment of interest. As a non-diversified investment company, the Fund may invest a significant portion of its assets in a small number of issuers. The Fund may engage in various portfolio strategies to seek to enhance income and hedge its portfolio against investment, interest rate and foreign currency risks, including the use of leverage and the use of derivative financial instruments. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily capital appreciation. An investment in the Fund may be speculative in that it involves a high degree of risk and should not constitute a complete investment program. Investors should carefully assess the risks associated with an investment in the Fund. See "Risk Factors" beginning on page 27 for information that should be considered by prospective investors. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price Proceeds to the Sales to the Public(1) Load(1)(2) Fund(3) ---------------- ------------ ---------------- Per Share ......... $ 10.00 None $ 10.00 Total (4) ......... $400,000,000 None $400,000,000 - -------------------- ------------ ------------ ------------
(footnotes on the following page) THE FUND IS NEWLY ORGANIZED AND THEREFORE HAS NO HISTORY OF PUBLIC TRADING. CLOSED-END FUND SHARES FREQUENTLY TEND TO TRADE AT A DISCOUNT FROM NET ASSET VALUE WHICH CREATES A RISK OF LOSS FOR INVESTORS PURCHASING SHARES IN THIS OFFERING. The Shares are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters, and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the Shares will be made against payment in New York, New York on or about July 31, 1998. Donaldson, Lufkin & Jenrette Advest, Inc. FAC/Equities Fahnestock & Co. Inc. First of Michigan Corporation Gruntal & Co., L.L.C. Interstate/Johnson Lane Corporation Janney Montgomery Scott Inc. Sands Brothers & Co., Ltd. Sutro & Co. Incorporated Tucker Anthony Incorporated Johnston, Lemon & Co. Incorporated
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF THE FUND. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." -------------- (continued from cover page) This Prospectus sets forth in concise form the information about the Fund that a prospective investor should know before investing in the Fund. Investors should read and retain this Prospectus for future reference. DLJIM will serve as investment manager to the Fund. The Fund's address is 277 Park Avenue, New York, New York 10172, and its toll-free telephone number is 1-888-649-5711. At times, the Fund expects to utilize leverage through borrowings, including the issuance of debt securities or the issuance of preferred shares or through other transactions, such as reverse repurchase agreements, which have the effect of leverage. The Fund intends to utilize leverage in an initial amount equal to approximately 20% of its total assets (including the amount obtained through leverage), but the Fund may increase this percentage in the future. The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to common shareholders than that obtainable over time with an unleveraged capital structure. Use of leverage creates an opportunity for increased income and capital appreciation for the common shareholders but, at the same time, creates special risks, and there can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Risk Factors--Leverage" on page 28 for information that should be considered by prospective investors. The Fund is offering its common shares of beneficial interest, par value $.001 per share (the "Shares"). Prior to this offering, there has been no market for the Shares. The Shares have been approved for listing on the New York Stock Exchange under the symbol "DHY," subject to official notice of issuance. Shares of closed-end management investment companies frequently trade at discounts from their net asset values, and the Shares may also trade at a discount. The minimum investment in this offering is 200 Shares ($2,000). (footnotes from cover page) (1) DLJIM or an affiliate (not the Fund) from its own assets will pay a commission to the Underwriters in the amount of 5% of the Price to the Public per Share in connection with the sale of the Shares offered hereby. See "Underwriting." (2) The Fund and DLJIM have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (3) Before deducting organizational and offering costs payable by the Fund, including payment of $150,000 to the Underwriters in partial reimbursement of their expenses related to the organization of the Fund, estimated at $60,000 and $899,200, respectively. Offering costs will be deducted from net proceeds, and organizational costs will be capitalized and amortized to expense from commencement of operations of the Fund through October 31, 1999. (4) The Fund has granted to the Underwriters a 60-day option exercisable from time to time to purchase up to an aggregate of 6,000,000 additional Shares solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public and Proceeds to the Fund will be $460,000,000. See "Underwriting." ii PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. Investors should carefully consider information set forth under the heading "Risk Factors." The Fund............................... DLJ High Yield Bond Fund (the "Fund") is a newly organized, non-diversified, closed-end management investment company. The Fund is managed by DLJ Investment Management Corp. ("DLJIM"). See "The Fund." The Offering........................... The Fund is offering common shares of beneficial interest, par value $.001 per share (the "Shares"), through a group of underwriters ("Underwriters") led by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). The Underwriters have been granted a 60-day option exercisable from time to time to purchase up to an aggregate of 6,000,000 additional Shares solely to cover over-allotments, if any. The initial public offering price is $10.00 per Share. The minimum investment in the offering is 200 Shares ($2,000). See "Underwriting." No Sales Load.......................... The Shares will be sold in the offering without any sales load or underwriting discounts payable by investors or the Fund. DLJIM or an affiliate (not the Fund) will pay a commission from its own assets to the Underwriters in connection with sales of the Shares in the offering. See "Underwriting." Investment Objectives and Policies..... The Fund's primary investment objective is to seek high current income. The Fund may, and in certain market conditions will, seek to maximize return through opportunistic investment in smaller high yield issues. The Fund will also seek capital appreciation as a secondary objective, to the extent consistent with its objective of seeking high current income. The Fund is designed for investors willing to assume additional risk in return for the potential for high current income and capital appreciation. The Fund is not intended to be a complete investment program and there can be no assurance that the Fund will achieve its objectives. Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's Investors Service, Inc. ("Moody's") or lower than BBB by Standard & Poor's Ratings Group ("S&P") or comparably rated by another nationally recognized rating agency) or in unrated income securities that DLJIM determines to be of comparable quality. Lower grade income securities are commonly known as "junk bonds." As a component of the Fund's investment in "junk bonds," the Fund may also invest up to 20% of its total assets in securities of issuers that are the subject of bankruptcy proceedings or in securities otherwise in default or in significant risk of being in default ("Distressed 1 Securities"). However, the Fund does not intend initially to invest in any Distressed Securities. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies or multinational currency units. The Fund may engage in various portfolio strategies to seek to enhance income and hedge its portfolio against investment, interest rate and foreign exchange risks, including the use of leverage and the use of derivative financial instruments. There can be no assurance that the Fund's strategies will be successful. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily capital appreciation. An investment in the Fund may be speculative in that it involves a high degree of risk. At times, the Fund expects to utilize leverage through borrowings, including the issuance of debt securities, or the issuance of preferred shares or through other transactions, such as reverse repurchase agreements, which have the effect of leverage. The Fund intends to utilize leverage in an initial amount equal to approximately 20% of its total assets, but it may use leverage up to 331/3% of its total assets (50% if in the form of preferred shares) (in each case including the amount obtained through leverage). The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to holders of Shares (the "Shareholders") than that obtainable over time with an unleveraged capital structure. Use of leverage creates an opportunity for increased income and capital appreciation for the Shareholders but, at the same time, creates special risks, and there can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Risk Factors--Leverage." In selecting investments for the Fund's portfolio, DLJIM will seek to identify issuers and industries that DLJIM believes are likely to experience stable or improving financial conditions. DLJIM believes that this strategy should enhance the Fund's ability to earn high current income while also providing opportunities for capital appreciation. DLJIM's analysis may include consideration of general industry trends, the issuer's managerial strength, market position, financial condition, debt maturity schedules and liquidity. DLJIM may also consider relative values based on cash flow, interest or dividend coverage, asset coverage and earnings prospects. Initially, DLJIM will tend to make investments in larger, more liquid high yield issues because of the need to be fully invested soon after issuance of Shares to maximize current income. However, DLJIM believes that focusing on smaller, less liquid 2 high yield issues over the long term may offer a return premium that can be captured through a research- intensive investment process. Smaller high yield issues are defined as those of companies whose total outstanding high yield debt is $100 million or less. DLJIM may instead focus on larger high yield issues if market conditions warrant. There can be no assurances that this strategy will be successful. The Fund will seek its secondary objective of capital appreciation by investing in securities that DLJIM expects may appreciate in value as a result of favorable developments affecting the business or prospects of the issuer, which may improve the issuer's financial condition and credit rating, or as a result of declines in long-term interest rates. The Fund may implement various temporary "defensive" strategies at times when DLJIM determines that conditions in the markets make pursuing the Fund's basic investment strategy inconsistent with the best interests of Shareholders. These strategies may include investing less than 65% of its total assets in lower grade income securities by investing in higher quality debt and/or money market instruments. See "Investment Objectives and Policies." Investment Manager..................... DLJIM is the Fund's investment manager and is responsible for the management of the Fund's investment portfolio, including determining the composition of the Fund's portfolio, placing all orders for the purchase and sale of securities and for other transactions, and overseeing the settlement of the Fund's securities and other portfolio transactions. For these investment management services, the Fund will pay DLJIM a monthly fee (the "Management Fee") in arrears at an annual rate equal to 1% of the average weekly value of the Fund's total assets minus the sum of accrued liabilities (other than the aggregate indebtedness constituting leverage) (the "Managed Assets"). During periods in which the Fund is utilizing leverage, the Management Fee will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Managed Assets including those purchased with leverage. DLJIM provides investment management services primarily to other investment companies and institutional and corporate clients. As of June 30, 1998, aggregate assets under the management of DLJIM exceeded $5 billion. As of June 30, 1998, Donaldson, Lufkin & Jenrette Asset Management Group ("DLJAM"), which includes DLJIM, managed assets of approximately $17 billion. DLJIM is a wholly-owned subsidiary of DLJ. Administrator.......................... The Fund's administrator is First Data Investor Services Group, Inc. ("First Data"). First Data is responsible for providing various services to the Fund, includ- 3 ing, among other things, overseeing the provision to the Fund of accounting services, preparing or assisting in preparing materials for Shareholders and regulatory agencies and any other Shareholder servicing activities. For these administration services, the Fund will pay First Data a fee (the "Administration Fee") at the annual rate of $50,000 per year. First Data provides administration services to other investment companies. Listing................................ Prior to this offering, there has been no market for the Shares. The Shares have been approved for listing on the New York Stock Exchange under the symbol "DHY," subject to official notice of issuance. Dividends and Other Distributions...... The Fund intends to distribute monthly dividends consisting of substantially all of its net investment income to Shareholders. The initial distribution to Shareholders is expected to be paid approximately 60 days after the completion of the offering of the Shares. All net realized capital gains, if any, are expected to be distributed to the Shareholders at least annually. See "Dividends and Other Distributions." Automatic Dividend Reinvestment Plan... The Fund has established an Automatic Dividend Reinvestment Plan (the "Plan"). Under the Plan, all dividend and capital gain distributions will be automatically reinvested in additional Shares of the Fund either purchased in the open market, or issued by the Fund if the Shares are trading at or above their net asset value, unless in either case the Shareholder elects to receive cash. A Shareholder who intends to hold Shares through a broker or nominee should contact its broker or nominee to determine whether or how they may participate in the Plan. See "Automatic Dividend Reinvestment Plan." Taxes.................................. The Fund intends to elect to be, and to qualify as, a regulated investment company for U.S. federal income tax purposes. For each taxable year the Fund so qualifies, the Fund (but not Shareholders) will be relieved of U.S. federal income tax on the portion of its investment company taxable income and net capital gain that it distributes to Shareholders. See "Taxes." Share Repurchases and Tender Offers; Conversion to an Open-End Investment Company.................... In recognition of the possibility that the Shares might trade at a discount to net asset value and that any such discount may not be in the interest of Shareholders, the Fund's Board of Trustees (the "Board" or the "Trustees"), in consultation with DLJIM, from time to time may consider the possibility of making open market repurchases or tender offers for Shares at net asset value. There can be no assurance that the Board will consider or decide to undertake either of these actions or that, if undertaken, such actions would result in the Shares trading at a price equal to or close to net asset 4 value per Share. The Board from time to time also may consider the conversion of the Fund to an open-end investment company. Such conversion would require the affirmative consent of two-thirds of each class of Shares outstanding at that time (or a majority of each class if two-thirds of the Board vote in favor of such conversion). See "Conversion to Open-End Fund." Custodian and Transfer and Dividend Disbursing Agent............. Citibank, N.A. will act as custodian for the Fund and may employ sub-custodians outside the U.S. approved by the Custodian of the Fund in accordance with regulations of the Securities and Exchange Commission ("SEC"). First Data will act as the Fund's Transfer and Dividend Disbursing Agent. Risk Factors........................... Investors are advised to consider carefully the special risks involved in investing in the Fund. General. The Fund is a newly organized, non-diversified, closed-end management investment company and has no operating history. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The Shares are designed primarily for long-term investors and should not be considered a vehicle for trading purposes. The net asset value of the Shares will fluctuate with interest rate changes as well as with price changes of the Fund's portfolio securities and these fluctuations are likely to be greater during periods in which the Fund utilizes a leveraged capital structure. See "Other Investment Practices--Leverage." Lower Grade Securities. Lower grade securities are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Lower grade securities are commonly referred to as "junk bonds." Issuers of lower grade securities may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of lower grade securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During periods of economic downturn, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, the issuer's inability to meet specific projected business forecasts or the unavailability of additional financing. Therefore, there can be no assurance that in the future there will not exist a higher default rate relative to the rates currently existing in the market 5 for lower grade securities. The risk of loss due to default by the issuer is significantly greater for the holders of lower grade securities because such securities may be unsecured and may be subordinate to other securities of the issuer. Other than with respect to Distressed Securities, discussed below, the lower grade securities in which the Fund may invest do not include instruments which, at the time of investment, are in default or the issuers of which are in bankruptcy. However, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs. Lower grade securities frequently have call or redemption features that would permit an issuer to repurchase the security from the Fund. If a call were exercised by the issuer during a period of declining interest rates, the Fund is likely to have to replace such security with a lower yielding security, thus decreasing the net investment income to the Fund and dividends to Shareholders. Lower grade securities have been in the past, and may again in the future be, more volatile than higher-rated fixed-income securities, so that adverse economic events may have a greater impact on the prices of lower grade securities than on higher-rated fixed-income securities. Factors adversely affecting the market value of such securities are likely to affect adversely the Fund's net asset value. Recently, demand for lower grade securities has increased significantly and the difference between the yields paid by lower grade securities and investment grade bonds (i.e., the "spread") has narrowed. To the extent this differential increases, the value of lower grade securities in the Fund's portfolio could be adversely affected. Like higher-rated fixed-income securities, lower grade securities generally are purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in the lower grade securities market, which market may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for lower grade securities by various dealers. As a result, during periods of high demand in the lower grade securities market, it may be difficult to acquire lower grade securities appropriate for investment by the Fund. Adverse economic conditions and investor perceptions thereof (whether or not based on economic reality) may impair liquidity in the lower grade securities market and may cause the prices the Fund receives for its lower grade securities to be reduced. In addition, the Fund may experience diffi- 6 culty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as deterioration in the creditworthiness of the issuers. Under such conditions, judgment may play a greater role in valuing certain of the Fund's portfolio instruments than in the case of instruments trading in a more liquid market. In addition, the Fund may incur additional expense to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. See "Investment Objectives and Policies." Distressed Securities. As a component of the Fund's investment in "junk bonds," the Fund may invest up to 20% of its total assets in Distressed Securities. Such securities are the subject of bankruptcy proceedings or otherwise in default as to the repayment of principal and/or payment of interest at the time of acquisition by the Fund or are rated in the lower rating categories (Ca or lower by Moody's and CC or lower by S&P) or which, if unrated, are in the judgment of DLJIM of equivalent quality. Investment in Distressed Securities is speculative and involves significant risk. Distressed Securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent the Fund pursues its secondary objective of capital appreciation through investment in Distressed Securities, the Fund's ability to achieve current income for Shareholders may be diminished. See "Investment Objectives and Policies." Smaller Companies in General. The Fund may invest in smaller high yield issues which are those of companies whose total outstanding high yield debt is $100 million or less. Such smaller high yield issues may be issued by any company but are often issued by smaller companies. In addition to the general risks of such securities, those issued by smaller companies often have higher market risks associated with them. They may have limited product lines, markets, market share or financial resources, or they may be dependent on a small or inexperienced management team. In addition, their securities may be less liquid, have more limited volume or be subject to greater and more abrupt price swings than securities of larger companies. Leverage. The use of leverage by the Fund creates an opportunity for increased net income and capital appreciation for the Shares, but, at the same time, creates special risks. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. The Fund intends to utilize leverage to provide the Shareholders with a poten- 7 tially higher return. Leverage creates risks for Shareholders including the likelihood of greater volatility of net asset value and market price of the Shares and the risk that fluctuations in interest rates on borrowings and debt or in the dividend rates on any preferred shares may affect the return to the Shareholders. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to Shareholders as dividends and other distributions will be reduced. In the latter case, DLJIM in its best judgment may nevertheless determine to maintain the Fund's leveraged position if it deems such action to be appropriate under the circumstances. During periods in which the Fund is utilizing leverage, the Management Fee will be higher than if the Fund did not utilize a leveraged capital structure. Certain types of borrowings by the Fund may result in the Fund being subject to covenants in credit agreements, including those relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more Rating Agencies, which may issue ratings for the debt securities or preferred shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act of 1940, as amended (the "Investment Company Act"). It is not anticipated that these covenants or guidelines will impede DLJIM in managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. Subject to applicable regulatory requirements, the Fund at times may borrow from affiliates of DLJIM, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. See "Other Investment Practices--Leverage." Foreign Securities. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside of the United States or that are denominated in various foreign currencies or multinational foreign currency units. Investing in securities of foreign entities and securities denominated in foreign currencies involves certain risks not involved in domestic investments, including, but not limited to, fluctuations in foreign exchange rates, future foreign political and economic developments, different legal and accounting systems and the possible imposition of exchange con- 8 trols or other foreign governmental laws or restrictions. Securities prices in different countries are subject to different economic, financial, political and social factors. Since the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities in the Fund and the unrealized appreciation or depreciation of investments. Currencies of certain countries may be volatile and therefore may affect the value of securities denominated in such currencies. The Fund may engage in certain transactions to hedge the currency-related risks of investing in non-U.S. dollar denominated securities. See "Other Investment Practices." In addition, with respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, difficulty in obtaining or enforcing a court judgment, economic, political or social instability or diplomatic developments that could affect investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain foreign investments also may be subject to foreign withholding taxes. These risks often are heightened for investments in smaller, emerging capital markets. See "Investment Objectives and Policies." As a result of these potential risks, DLJIM may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. The Fund may invest in countries in which foreign investors, including DLJIM, have had no or limited prior experience. Other Investment Management Techniques. The Fund may use various other investment management techniques that also involve special considerations, including engaging in interest rate transactions, utilization of options and futures transactions, making forward commitments and lending its portfolio securities. For further discussion of these and other practices and the associated risks and special considerations, see "Other Investment Practices." Illiquid Securities. The Fund may invest in securities for which no readily available market exists or which are otherwise illiquid. The Fund may not be able readily to dispose of such securities at prices that approximate those at which the Fund could sell such securities if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Illiquid securities generally trade at a discount. 9 Non-Diversified Status. The Fund is classified as a "non-diversified" management investment company under the Investment Company Act, which means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a "diversified" management investment company. Accordingly, the Fund may be subject to greater risk with respect to its portfolio securities than a management investment company that is "diversified" because changes in the financial condition or market assessment of a single issuer may cause greater fluctuations in the net asset value of the Shares. Market Price, Discount and Net Asset Value of Shares. Shares of closed-end management investment companies in the past frequently have traded at a discount from their net asset values. Whether investors will realize gains or losses upon the sale of Shares will not depend directly upon the Fund's net asset value, but will depend upon the market price of the Shares at the time of sale. Since the market price of the Shares will be determined by such factors as relative demand for and supply of the Shares in the market, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Shares will trade at, below or above net asset value or at, below or above the initial offering price. The Shares are designed primarily for long-term investors, and investors in the Shares should not view the Fund as a vehicle for trading purposes. See "Risk Factors" and "Description of Shares." Anti-Takeover Provisions. The Fund's Agreement and Declaration of Trust (the "Declaration of Trust") contains provisions limiting (i) the ability of other entities or persons to acquire control of the Fund, (ii) the Fund's freedom to engage in certain transactions, and (iii) the ability of the Board or Shareholders to amend the Declaration of Trust. These provisions of the Declaration of Trust may be regarded as "anti-takeover" provisions. These provisions could have the effect of depriving the Shareholders of opportunities to sell their Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. See "Investment Objectives and Policies," "Risk Factors" and "Description of Shares." 10 FEE TABLE The following tables are intended to assist investors in understanding the various costs and expenses that an investor in the Fund will bear, directly or indirectly.
Assuming 20% Leverage Shareholder Transaction Expenses: Sales Load (as a percentage of offering price) ........................ None Automatic Dividend Reinvestment Plan Fees ............................. None Annual Expenses (as a percentage of net assets attributable to Shares): Investment Management Fee(2) .......................................... 1.25% Administration Fee .................................................... 0.02 Interest Payments on Borrowed Funds(3) ................................ 1.50 Other Expenses ........................................................ 0.17 ------- Total Annual Expenses ................................................. 2.94%(1) =========
(1) Total Annual Expenses would be 1.19% if the Fund were not to utilize leverage. Total Annual Expenses in the table above reflect the use of 20% leverage through borrowed funds, and not the use of preferred shares. "Other Expenses" have been estimated. The Fund will only enter into leverage if DLJIM anticipates that the returns to investors with its use will be greater than if such leverage is not utilized. The chart above reflects leverage in an initial amount equal to approximately 20% of its total assets (including the amount obtained from leverage); however, the Fund has the ability to utilize leverage in an amount up to 331/3% of its total assets from borrowing and 50% through the use of preferred shares (in each case including the amount obtained from leverage). See "Risk Factors--Leverage" and "Other Investment Policies--Leverage." In the event the Fund does not utilize leverage, it is estimated that, as a percentage of net assets attributable to the Shares, the Management Fee would be 1.00%, the Administration Fee would remain 0.02%, there would be no Interest Payments on Borrowed Funds, and other Expenses would remain 0.17%. Therefore, Total Annual Expenses would be 1.19%. (2) DLJIM is paid a Management Fee of 1.00% of Managed Assets (see "Prospectus Summary--Investment Manager"). The number in the table above reflects the use of leverage. If the Fund does not utilize leverage, Managed Assets will equal net assets of the Fund and DLJIM's Management Fee will be 1.00% of net assets. However, as the Fund's use of leverage increases, the Management Fee as a percentage of net assets also increases, as shown in the table above. See "Management of the Fund" for additional information. (3) Assumes an interest rate of 6%. Example: The following Example illustrates the projected dollar amount of cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in the Fund. These amounts are based upon payment by the Fund of expenses at the levels set forth in the above table. An investor would directly or indirectly pay the following expenses on a $1,000 investment in the Fund, assuming (i) total annual expenses of 1.19% (assuming no leverage) and 2.94% (assuming leverage of 20% of the Fund's total assets) and (ii) a 5% annual return throughout the periods and reinvestment of all dividends and other distributions at net asset value:
1 Year 3 Years 5 Years 10 Years -------- --------- --------- --------- Assuming No Leverage ........... $12 $38 $ 65 $144 Assuming 20% Leverage .......... $30 $91 $155 $326
The above tables and the assumption in the Example of a 5% annual return and reinvestment at net asset value are required by regulation of the SEC applicable to all investment companies; the assumed 5% annual return is not a prediction of, and does not represent, the projected or actual performance of the Shares. Actual expenses and annual rates of return may be more or less than those assumed for purposes of the Example. In addition, although the Example assumes reinvestment of all dividends and other distributions at net asset value, participants in the Fund's Automatic Dividend Reinvestment Plan may receive Shares obtained by the Plan Agent at or based on the market price in effect at that time, which may be at, above or below net asset value. This Example should not be considered a representation of future expenses, and the Fund's actual expenses may be more or less than those shown. 11 THE FUND DLJ High Yield Bond Fund is registered under the Investment Company Act as a non-diversified, closed-end management investment company. The Fund was organized as an unincorporated business trust under the laws of the State of Delaware on April 24, 1998 and has no operating history. The Fund's principal office is located at 277 Park Avenue, New York, New York 10172, and its toll-free telephone number is 1-888-649-5711. DLJIM is the Fund's investment manager. The Fund has been organized as a closed-end management investment company. Closed-end management investment companies differ from open-end management investment companies (commonly referred to as mutual funds) in that closed-end management investment companies do not redeem their securities at the option of the shareholder, whereas mutual funds issue securities redeemable at net asset value at any time at the option of the shareholder and typically engage in a continuous offering of their shares. Mutual funds are subject to continuous asset in-flows and out-flows that can complicate portfolio management, whereas closed-end funds generally can stay more fully invested. To facilitate redemption obligations, mutual funds are subject to more stringent regulatory limitations on certain investments, such as investments in illiquid securities, than are closed-end funds. However, shares of closed-end companies frequently trade at a discount from net asset value. DLJIM believes that its affiliation with DLJ will enable the Fund to benefit from DLJ's market leadership in high yield securities. During the period from 1993 through 1997, DLJ was the leading high yield lead-underwriter (measured by dollar volume) with approximately $37.9 billion of securities offered. DLJ's average monthly trading volume in high yield securities exceeds $5 billion, and DLJ's traders average over ten years of experience. DLJ's high yield underwriting and trading position is supported by an award-winning research group, which will be made available to DLJIM. USE OF PROCEEDS The proceeds of this initial public offering are estimated at $400,000,000 ($460,000,000 if the Underwriters' overallotment option is exercised in full) before payment of organizational and offering costs (estimated at $60,000 and $899,200, respectively). The proceeds will be invested in accordance with the Fund's investment objectives and policies during a period not to exceed six months from the closing of the initial public offering. Pending such investment, the proceeds may be invested in U.S. dollar-denominated, high quality, short-term instruments. A portion of the Fund's organizational and offering costs has been advanced by DLJIM and will be repaid by the Fund upon completion of the initial public offering. DLJIM or an affiliate (not the Fund) from its own assets will pay a commission to the Underwriters in connection with sales of Shares in this offering. See "Underwriting." 12 INVESTMENT OBJECTIVES AND POLICIES Investment Objectives The Fund's primary investment objective is to seek high current income. The Fund may seek to maximize return through opportunistic investment in smaller high yield issues. The Fund will also seek capital appreciation as a secondary objective to the extent consistent with its objective of seeking high current income. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily capital appreciation. The Fund is not intended to be a complete investment program and there can be no assurance that the Fund will achieve its objectives. Investment Policies Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's or lower than BBB by S&P or comparably rated by another nationally recognized rating agency) or in unrated income securities that DLJIM determines to be of comparable quality. Lower grade income securities are commonly known as "junk bonds." As a component of the Fund's investment in "junk bonds," the Fund may also invest up to 20% of its total assets in Distressed Securities. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies and multinational currency units. The Fund may also invest in money market instruments consisting of U.S. Government securities, certificates of deposits, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments and repurchase agreements. Under normal market conditions, the Fund does not expect to have a substantial portion of its assets invested in money market instruments. At times, the Fund expects to utilize leverage through borrowings, including the issuance of debt securities, or the issuance of preferred shares or through other transactions, such as reverse repurchase agreements, which have the effect of leverage. The Fund intends to utilize leverage in an initial amount equal to approximately 20% of its total assets, but may use leverage up to 331/3% of its total assets through borrowing and 50% through the use of preferred shares (in each case including the amount obtained through leverage). The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to Shareholders than that obtainable over time with an unleveraged capital structure. Use of leverage creates an opportunity for increased income and capital appreciation for the Shareholders but also creates special risks. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Other Investment Practices--Leverage" and "Risk Factors--Leverage." The Fund may implement various temporary "defensive" strategies at times when DLJIM determines that conditions in the markets make pursuing the Fund's basic investment strategy inconsistent with the best interests of Shareholders. These strategies may include investing less than 65% of its total assets in lower grade income securities by investing in higher quality debt and/or money market instruments. In selecting investments for the Fund's portfolio, DLJIM will seek to identify issuers and industries that DLJIM believes are likely to experience stable or improving financial conditions. DLJIM believes that this strategy should enhance the Fund's ability to earn high current income while also providing opportunities for capital appreciation. DLJIM's analysis may include consideration of general industry trends, the issuer's managerial strength, market position, financial condition, debt maturity schedules and liquidity. DLJIM may also consider relative values based on cash flow, interest or dividend coverage, asset coverage and earnings prospects. Initially, DLJIM will tend to make investments in larger, more liquid high yield issues because of the need to be fully invested soon after issuance of Shares to maximize current income. However, DLJIM believes that focusing on smaller, less liquid high yield issues over the long term may offer a return premium that can be captured through a research-intensive investment process. Smaller high yield issues are defined as those of companies whose total outstanding high yield debt is $100 million or less. DLJIM may instead focus on larger high yield issues if market conditions warrant. The Fund will seek its secondary objective of capital appreciation by investing in securities that DLJIM expects may appreciate in value as a result of favorable developments affecting the business or prospects of the issuer which may improve the issuer's financial condition and credit rating or as a result of declines in long-term interest rates. There can be no assurance the Fund's strategies will be successful. The market of outstanding lower grade income securities has increased over the years. The outstanding principal amounts of lower grade income securities of U.S. issuers in 1984 was $56.5 billion, in 1989 was $241.8 billion, in 1994 was $282.6 billion and in 1997 was over $460 billion. The statistical information with respect to the principal amounts of outstanding securities is based on information the Fund obtained from DLJ. 13 High yield securities historically have been riskier investments than more highly rated bonds, although in recent years high yield securities have produced high absolute returns with lower risk in terms of standard deviation or volatility than equity securities. DLJIM believes that high yield securities offer diversification to fixed-income and equity portfolios and that the returns of high yield securities have a relatively low historical correlation of returns with other asset classes. Total annual returns for the market for (i) lower-grade income securities, as measured by the DLJ High Yield Bond Index, an industry index for the high yield bond market (the "High Yield Bond Index"), (ii) investment-grade income securities, as measured by the ML Corporate Index and (iii) the U.S. Treasury Bill market, as measured by the SB U.S. Three-Month Treasury Bill Index, as well as the default rates on the lower grade income securities as measured by the Altman Default Study from 1989 through 1996 and DLJ for 1997 are reflected in the chart below. The Fund will have no direct investment in, nor will its performance be indicative of, these unmanaged indices, nor are these results indicative of the future performance of these indices or of the Fund. The table below is for illustrative purposes only and the past performance of any security should not be viewed as indicative of the future performance of the Fund or of the anticipated return to Shareholders. RETURNS ON INDICES OF FIXED INCOME SECURITIES(1)
SB U.S. High Yield ML Corporate 3-month Year Bond Index Index Treasury Bill Default Rate - ------ ------------ -------------- --------------- ------------- 1989 0.39% 14.12% 8.73% 4.29% 1990 (6.38) 7.37 8.06 10.14 1991 43.75 18.24 6.01 10.27 1992 16.66 9.12 3.74 3.40 1993 18.00 12.43 3.09 1.11 1994 (2.04) (3.34) 4.06 1.45 1995 19.68 21.23 5.81 1.90 1996 13.03 3.66 5.28 1.23 1997 12.21 10.39 5.28 0.84
(1) The High Yield Bond Index is an unmanaged composite of U.S. dollar-denominated securities rated below Baa by Moody's or below BBB by S&P. The ML Corporate Index is an unmanaged composite index which includes fixed coupon domestic corporate bonds that are rated no lower than Baa by Moody's or BBB by S&P. The Fund will invest primarily in bonds, debentures, notes and other debt instruments. The Fund's portfolio securities may have fixed or variable rates of interest and may include zero coupon securities, payment-in-kind securities or other deferred payment securities, preferred stock, convertible debt obligations and convertible preferred stock, units consisting of debt or preferred stock with warrants or other equity features, participation interests in, or assignments of, commercial loans, government securities, stripped securities, commercial paper and other short-term debt obligations. The issuers of the Fund's portfolio securities may include domestic and foreign corporations, partnerships, trusts or similar entities, and governmental entities or their political subdivisions, agencies or instrumentalities. The Fund may invest in companies in, or governments of, developing countries. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies and multinational foreign currency units. In connection with its investments in corporate debt securities, or restructuring of investments owned by the Fund, the Fund may receive warrants or other non-income producing equity securities. The Fund may retain such securities, including equity shares received upon conversion of convertible securities, until DLJIM determines it is appropriate in light of current market conditions to dispose of such securities. Portfolio Securities Lower Grade Securities Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed-income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's or lower than BBB by S&P or comparably rated by another rating agency) or in unrated fixed-income securities that DLJIM determines to be of comparable quality. Securities rated Ba by Moody's or BB by S&P and lower are considered to have speculative elements, with higher vulnerability to default than corporate securities with higher ratings. See "Appendix A--Ratings of Corporate Bonds" for additional information concerning rating categories of Moody's and S&P. 14 Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The retail secondary market for lower grade securities may be less liquid than that of higher rated securities; adverse conditions could make it difficult at times for the Fund to sell certain securities or could result in lower prices than those used in calculating the Fund's net asset value. Bond prices generally are inversely related to interest rate changes; however, bond price volatility also is inversely related to coupon. Accordingly, lower grade securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity, because of their higher coupon. This higher coupon is what the investor receives in return for bearing greater credit risk. The higher credit risk associated with lower grade securities potentially will have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity, and will be a substantial factor in the Fund's relative Share price volatility. Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could disrupt severely the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities. The ratings of Moody's, S&P and the other rating agencies represent their opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, DLJIM also will evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Fund invests in lower grade securities that have not been rated by a rating agency, the Fund's ability to achieve its investment objectives will be more dependent on DLJIM's credit analysis than would be the case when the Fund invests in rated securities. The Fund may also invest in zero coupon, pay-in-kind or deferred payment lower grade 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 annually to have received "phantom income." Because the Fund will distribute this "phantom income" to Shareholders, to the extent that Shareholders 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 less liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular interest payment periods. Preferred Stock Preferred stock represents a share of ownership in a company. Generally, preferred stock has a specified dividend and ranks after bonds but before common stock on its claim on a company's income for dividend payments and on a company's assets should the company's assets be liquidated. While most preferred stocks pay a dividend, the Fund may purchase preferred stock where the issuer has failed to pay, or is in danger of failing to pay, the dividends on such preferred stock, or may purchase preferred stock that pays a dividend in kind. Convertible Securities Convertible securities may be converted at either a stated price or stated rate into underlying shares of common stock. Convertible securities have characteristics similar to both fixed-income and equity securities. Convertible securities generally are subordinated to other similar but non-convertible securities of the same issuer, although convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to shares of common stock of the same issuer. Because of the subordination feature, however, convertible securities typically have lower ratings than similar non-convertible securities. Although to a lesser extent than with fixed-income securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock. As the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same 15 extent as the underlying common stock. When the market price of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. Convertible securities provide for a stable stream of income with generally higher yields than common stock and offer the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. In return, however, convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. Participation Interests The Fund may invest in corporate obligations denominated in U.S. and foreign currencies that are originated, negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift institutions, insurance companies, financial companies or other financial institutions one or more of which administer the security on behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third parties called "Participants." The Fund may invest in such securities either by participating as a Co-Lender at origination or by acquiring an interest in the security from a Co-Lender or a Participant (collectively, "participation interests"). Co-Lenders and Participants interposed between the Fund and the corporate borrower (the "Borrower"), together with Agent Banks, are referred to herein as "Intermediate Participants." The Fund also may purchase a participation interest in a portion of the rights of an Intermediate Participant, which would not establish any direct relationship between the Fund and the Borrower. In such cases, the Fund would be required to rely on the Intermediate Participant that sold the participation interest not only for the enforcement of the Fund's rights against the Borrower but also for the receipt and processing of payments due to the Fund under the security. Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the Borrower, in the event the Borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would be involved if the Fund would enforce its rights directly against the Borrower. Moreover, under the terms of a participation interest, the Fund may be regarded as a creditor of the Intermediate Participant (rather than of the Borrower), so that the Fund may also be subject to the risk that the Intermediate Participant may become insolvent. Similar risks may arise with respect to the Agent Bank if, for example, assets held by the Agent Bank for the benefit of the Fund were determined by the appropriate regulatory authority or court to be subject to the claims of the Agent Bank's creditors. In such case, the Fund might incur certain costs and delays in realizing payment in connection with the participation interest or suffer a loss of principal and/or interest. Further, in the event of the bankruptcy or insolvency of the Borrower, the obligation of the Borrower to repay the loan may be subject to certain defenses that can be asserted by such Borrower as a result of improper conduct by the Agent Bank or Intermediate Participant. Distressed Securities As a component of the Fund's investment in "junk bonds," the Fund may invest up to 20% of its total assets in Distressed Securities, including participation interests purchased in the secondary market. Investment in Distressed Securities is speculative and involves significant risk. Distressed Securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent the Fund pursues its secondary objective of capital appreciation through investment in Distressed Securities, the Fund's ability to achieve current income for Shareholders may be diminished. The Fund also will be subject to significant uncertainty as to when and in what manner and for what value the obligations evidenced by the Distressed Securities will eventually be satisfied (e.g., through a liquidation of the obligor's assets, an exchange offer or plan of reorganization involving the Distressed Securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to Distressed Securities held by the Fund, there can be no assurance that the securities or other assets received by the Fund in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made. Moreover, any securities received by the Fund upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of the Fund's participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of Distressed Securities, the Fund may be restricted from disposing of such securities. See "Risk Factors." Foreign Securities The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies or multinational foreign currency units. Foreign securities 16 markets generally are not as developed or efficient as those in the United States. Securities of some foreign issuers are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in most foreign securities markets are less than in the United States and, at times, volatility of price can be greater than in the United States. Because evidences of ownership of such securities usually are held outside the United States, the Fund will be subject to additional risks which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict the payment of principal and interest on the foreign securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Developing countries have economic structures that are generally less diverse and mature, and political systems that are less stable, than those of developed countries. The markets of developing countries may be more volatile than the markets of more mature economies; however, such markets may provide higher rates of return to investors. Many developing countries providing investment opportunities for the Fund have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have adverse effects on the economies and securities markets of certain of these countries. Since foreign securities often are purchased with and payable in currencies of foreign countries, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. The Fund may engage in certain transactions to hedge the currency related risks of investing in non-U.S. dollar denominated securities. See "Other Investment Practices." Variable and Floating Rate Securities Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate. The Fund may invest in floating rate debt instruments ("floaters"). The interest rate on a floater is a variable rate which is tied to another interest rate, such as a money-market index or Treasury Bill rate. The interest rate on a floater resets periodically, typically every six months. Because of the interest rate reset feature, floaters provide the Fund with a certain degree of protection against rises in interest rates, although the Fund will participate in any declines in interest rates as well. The Fund also may invest in inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed or inversely to a multiple of the applicable index. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality. U.S. Government Securities Securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities are supported by the full faith and credit of the U.S. Treasury; others by the right of the issuer to borrow from the Treasury; others by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies and instrumentalities, no assurance can be given that it will always do so since it is not so obligated by law. Foreign Government Obligations; Securities of Supranational Entities The Fund may invest in obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities that are determined by DLJIM to be of comparable quality to the other obligations in which the Fund may invest. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Stripped Securities The Fund may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Treasury Bonds that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. Such stripped securities also are issued by 17 corporations and financial institutions which constitute a proportionate ownership of the issuer's pool of underlying securities. A stripped security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The market prices of such securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond to a greater degree to changes in interest rates than coupon securities having similar maturities and credit qualities. Money Market Instruments The Fund may invest in the following types of money market instruments. Repurchase Agreements. In a repurchase agreement, the Fund buys, and the seller agrees to repurchase, a security at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. The Fund may enter into repurchase agreements with certain banks or non-bank dealers. Bank Obligations. The Fund may purchase certificates of deposit, time deposits, bankers' acceptances and other short-term obligations issued by domestic banks, foreign subsidiaries or foreign branches of domestic banks, domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign subsidiaries or foreign branches of domestic banks, and domestic and foreign branches of foreign banks, the Fund may be subject to additional investment risks. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time (in no event longer than seven days) at a stated interest rate. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Commercial Paper. Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Fund will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's or A-1 by S&P, (b) issued by companies having an outstanding unsecured debt issue currently rated at least A3 by Moody's or A- by S&P, or (c) if unrated, determined by DLJIM to be of comparable quality to those rated obligations which may be purchased by the Fund. Other Short-Term Corporate Obligations. These instruments include variable amount master demand notes, which are obligations that permit the Fund to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Fund, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and the Fund may invest in them only if at the time of an investment DLJIM determines that such investment is of comparable quality to those rated obligations which may be purchased by the Fund. 18 OTHER INVESTMENT PRACTICES The Fund may utilize other investment practices and portfolio management techniques as set forth below. Leverage At times, the Fund expects to utilize leverage through borrowings or issuance of debt securities or preferred shares. The Fund intends to utilize leverage in an initial amount equal to approximately 20% of its total assets (including the amount obtained from leverage); however, the Fund has the ability to utilize leverage in an amount up to 331/3% of its total assets if borrowing and 50% through the use of preferred shares (in each case including the amount obtained from leverage). The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to Shareholders than that obtainable if the Shares were unleveraged for any significant amount of time. The Fund currently expects that it may enter into a definitive agreement with respect to a credit facility at the closing of the offer and sale of the Shares offered hereby or shortly thereafter. The Fund is currently in negotiations with a major money center bank to arrange a revolving credit facility pursuant to which the Fund expects to be entitled to borrow up to $150 million. Any such borrowings would constitute financial leverage. The terms of any agreement relating to such a credit facility have not been determined and are subject to definitive agreement and other conditions. Under such agreement, the Fund may be required to prepay outstanding amounts under the facility or incur a penalty rate of interest in the event of the occurrence of certain events of default. The Fund expects to indemnify the lender under the facility against liabilities it may incur in connection with the facility. In addition, the Fund expects that such a credit facility would contain covenants which, among other things, likely will limit the Fund's ability to pay dividends in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions including mergers and consolidations, and may require asset coverage ratios in addition to those required by the Investment Company Act. The Fund expects that any credit facility would have customary covenants, negative covenants and default provisions. There can be no assurance that the Fund will enter into an agreement for a credit facility on terms and conditions representative of the foregoing or that additional material terms will not apply. In addition, if entered into, any such credit facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred shares or debt securities. Under the Investment Company Act, the Fund is not permitted to incur indebtedness unless immediately after such incurrence the Fund's total assets (less any liabilities and indebtedness not related to the issuance of senior securities) are at least 300% of the aggregate amount of all senior securities representing such indebtedness (i.e., such indebtedness may not exceed 331/3% of the Fund's total assets). Additionally, under the Investment Company Act, the Fund may not declare any dividend or other distribution upon any class of its capital shares, or purchase any such capital shares, unless the aggregate indebtedness of the Fund has, at the time of the declaration of any such dividend or distribution or at the time of any such purchase, an asset coverage of at least 300% after deducting the amount of such dividend, distribution, or purchase price, as the case may be. Under the Investment Company Act, the Fund is not permitted to issue preferred shares unless immediately after such issuance the Fund's total assets (less any liabilities and indebtedness not related to the issuance of senior securities) are at least 200% of the aggregate amount of (i) all senior securities representing indebtedness plus (ii) the involuntary liquidation preference of all senior securities representing preferred shares (i.e., such liquidation value may not exceed 50% of the Fund's total assets). The involuntary liquidation preference shall be the amount in which such preferred shares would be entitled upon the involuntary liquidation of the Fund. In addition, the Fund is not permitted to declare any cash dividend or other distribution on Shares unless, at the time of such declaration, the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of such liquidation value. If preferred shares are issued, the Fund intends, to the extent possible, to purchase or redeem preferred shares from time to time to maintain coverage of any preferred shares of at least 200%. The Fund also may borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise may require untimely dispositions of Fund securities. Subject to applicable regulatory requirements, the Fund at times may borrow from affiliates of DLJIM, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. The concept of leveraging is based on the premise that the cost of the assets to be obtained from leverage will be based on short-term rates which normally will be lower than the return earned by the Fund on its longer term portfolio investments. Since it is anticipated that the total assets of the Fund (including the assets obtained from leverage) will be invested in the higher yielding portfolio investments or portfolio investments with the potential 19 for capital appreciation, the Shareholders should be the beneficiaries of any incremental return. Should the differential between the return on the underlying assets and cost of leverage narrow, the incremental return "pick up" will be reduced. Leverage creates risks for Shareholders including the likelihood of greater volatility of net asset value and market price of the Shares, and the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any preferred shares may affect the return to the Shareholders. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return on the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to Shareholders as dividends and other distributions will be reduced. In the latter case, DLJIM in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it deems such action to be appropriate under the circumstances. As discussed under "Management of the Fund," the Management Fee paid to DLJIM will be calculated on the basis of the Fund's Managed Assets which includes proceeds from borrowings for leverage and the issuance of preferred shares. Capital raised through leverage will be subject to interest costs or dividend payments which may or may not exceed the income and appreciation on the assets purchased. The Fund, among other things, also may be required to maintain minimum average balances in connection with borrowings or to pay a commitment or other fee to maintain a line of credit; either of these requirements will increase the cost of borrowing over the stated interest rate. The issuance of classes of preferred shares involves offering expenses and other costs and may limit the Fund's freedom to pay dividends on Shares or to engage in other activities. Certain types of borrowings may result in the Fund being subject to covenants in credit agreements, including those relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more Rating Agencies which may issue ratings for the corporate debt securities or preferred shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. It is not anticipated that these covenants or guidelines will impede DLJIM from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. The Fund's willingness to borrow money and issue new securities for investment purposes, and the amount the Fund will borrow or issue, will depend on many factors, the most important of which are investment outlook, market conditions and interest rates. Successful use of a leveraging strategy depends on DLJIM's ability to predict correctly interest rates and market movements, and there is no assurance that a leveraging strategy will be successful during any period in which it is employed. Assuming the utilization of leverage by borrowings in the amount of approximately 20% of the Fund's total assets, and an annual interest rate of 6% payable on such leverage based on market rates as of the date of this Prospectus, the annual return that the Fund's portfolio must experience (net of expenses) in order to cover such interest payments would be 1.5%. The following table is designed to illustrate the effect on the return to a Shareholder of the leverage obtained by borrowings in the amount of approximately 20% of the Fund's total assets, assuming hypothetical annual returns of the Fund's portfolio of minus 10% to plus 10%. As the table shows, the leverage generally increases the return to Shareholders when portfolio return is positive and greater than the cost of leverage and decreases the return when the portfolio return is negative or less than the cost of leverage. The figures appearing in the table are hypothetical and actual returns may be greater or less than those appearing in the table. Assumed Portfolio Return (net of expenses) ......... (10)% (5)% 0 % 5% 10% Corresponding Share Return ......................... (14)% (8)% (1.5)% 5% 11%
Until the Fund borrows or issues preferred shares, the Shares will not be leveraged, and the risks and special considerations related to leverage described in this Prospectus will not apply. Such leveraging of the Shares cannot be fully achieved until the proceeds resulting from the use of leverage have been invested in longer-term debt instruments in accordance with the Fund's investment objectives and policies. Short-Selling In these transactions, the Fund sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the Fund must borrow the security to make delivery to the buyer. The 20 Fund is obligated to replace the security borrowed by purchasing it subsequently at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund, which would result in a loss or gain, respectively. Securities will not be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Fund's net assets. The Fund may not make a short sale which results in the Fund having sold short in the aggregate more than 10% of the outstanding securities of any class of an issuer. The Fund also may make short sales "against the box" in which the Fund enters into a short sale of a security it owns. See "Taxes." Until the Fund closes out its short position or replaces the borrowed security, it will: (a) maintain a segregated account, containing permissible liquid assets, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position. Lending Portfolio Securities The Fund may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. The Fund continues to be entitled to payments in amounts equal to the interest, dividends or other distributions payable on the loaned securities, which affords the Fund an opportunity to earn interest on the amount of the loan and on the loaned securities' collateral. Loans of portfolio securities may not exceed 331/3% of the value of the Fund's total assets, and the SEC currently requires the Fund to receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. According to the SEC, such loans currently must be terminable by the Fund at any time upon specified notice. The Fund might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Fund. In connection with its securities lending transactions, the Fund may return to the borrower or a third party which is acting as a "placing broker," a part of the interest earned from the investment of collateral received for securities loaned. Generally, the SEC currently requires that the following conditions must be met whenever portfolio securities are loaned: (1) the Fund must receive at least 100% cash or equivalent collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Fund must be able to terminate the loan at any time; (4) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) the Fund may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Board must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. If the regulatory requirements pertaining to portfolio securities lending were to change, the Fund would comply with such changes as required. Illiquid Securities The Fund may purchase securities subject to legal or contractual restriction, or that are otherwise illiquid, without limitation. When purchasing securities that have not been registered under the Securities Act of 1933, as amended, and are not readily marketable, the Fund will endeavor, to the extent practicable, to obtain the right to registration at the expense of the issuer. Generally, there will be a lapse of time between the Fund's decision to sell any such security and the registration of the security permitting sale. During any such period, the price of the securities will be subject to market fluctuations. However, where a substantial market of qualified institutional buyers has developed for certain unregistered securities purchased by the Fund pursuant to Rule 144A under the Securities Act of 1933, as amended, the Fund intends to treat such securities as liquid securities in accordance with procedures approved by the Board. Because it is not possible to predict with assurance how the market for specific restricted securities sold pursuant to Rule 144A will develop, the Board has directed DLJIM to monitor carefully the Fund's investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. To the extent that, for a period of time, qualified institutional buyers cease purchasing restricted securities pursuant to Rule 144A, the Fund's investing in such securities may have the effect of increasing the level of illiquidity in its investment portfolio during such period. Substantial illiquid positions in the Fund could adversely impact its ability to convert to open-end status. 21 Reverse Repurchase Agreements The Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement by the Fund to repurchase the securities at an agreed upon price, date and interest payment. The use by the Fund of reverse repurchase agreements involves many of the same risks of leverage described under "Risk Factors" and "--Leverage" since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. At the time the Fund enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If the Fund establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Fund; however, under circumstances in which the Fund does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of the Fund's limitation on borrowings. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities the Fund has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Fund in connection with the reverse repurchase agreement may decline in price. If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligation to repurchase the securities, and the Fund's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement. Derivatives The Fund may invest in, or use, derivatives ("Derivatives"). These are financial instruments that derive their performance, at least in part, from the performance of an underlying asset, index or interest rate. The Derivatives the Fund may use include options, futures contracts, forward contracts, securities and swaps. The Fund may invest in, or enter into, Derivatives for a variety of reasons, including to hedge certain market risks, to provide a substitute for purchasing or selling particular securities or to increase potential income gain. Derivatives may provide a cheaper, quicker or more specifically focused way for the Fund to invest than "traditional" securities would. Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular Derivative and the portfolio as a whole. Derivatives permit the Fund to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as the Fund can increase or decrease the level of risk, or change the character of the risk, of its portfolio by purchasing or selling specific securities. Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in Derivatives could have a large potential impact on the Fund's performance. If the Fund invests in Derivatives at inopportune times or judges market conditions incorrectly, such investments may lower the Fund's return or result in a loss. The Fund also could experience losses if its Derivatives were poorly correlated with its other investments, or if the Fund were unable to liquidate its position because of an illiquid secondary market. The market for many Derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for Derivatives. Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter Derivatives. Exchange-traded Derivatives generally are guaranteed by the clearing agency that is the issuer or counterparty to such Derivatives. This guarantee usually is supported by a daily payment system (i.e., variation margin requirements) operated by the clearing agency in order to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty credit risk associated with Derivatives purchased on an exchange. By contrast, no clearing agency guarantees over-the-counter Derivatives. Therefore, each party to an over-the-counter Derivative bears the risk that the counterparty will default. Accordingly, DLJIM will consider the creditworthiness of counterparties to over-the-counter Derivatives in the same manner as it would review the credit quality of a security to be purchased by the Fund. Over-the-counter Derivatives are less liquid than exchange-traded Derivatives since the other party to the transaction may be the only investor with sufficient understanding of the Derivative to be interested in bidding for it. 22 Futures and Options on Futures Transactions In General. The Fund may enter into futures contracts and options on futures contracts in U.S. domestic markets, such as the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange or on exchanges located outside the United States, such as the London International Financial Futures Exchange and the Sydney Futures Exchange Limited. Foreign markets may offer advantages such as trading opportunities or arbitrage possibilities not available in the United States. Foreign markets, however, may have greater risk potential than domestic markets. For example, some foreign exchanges are principal markets so that no common clearing facility exists and an investor may look only to the broker for performance of the contract. In addition, any profits that the Fund might realize in trading could be eliminated by adverse changes in the exchange rate, or the Fund could incur losses as a result of those changes. Transactions on foreign exchanges may include both commodities which are traded on domestic exchanges and those that are not. Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the Commodity Futures Trading Commission ("CFTC"). Engaging in these transactions involves risk of loss to the Fund that could adversely affect the value of the Fund's net assets. Although the Fund intends to purchase or sell futures contracts and options thereon only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract or option prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract or option prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures or option positions and potentially subjecting the Fund to substantial losses. Successful use of futures and options on futures by the Fund also is subject to the ability of DLJIM to predict correctly movements in the direction of the relevant market and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract or option thereon. For example, if the Fund uses futures to hedge against the possibility of a decline in the market value of securities held in its portfolio and the prices of such securities instead increase, the Fund will lose part or all of the benefit of the increased value of securities that it has hedged because it will have offsetting losses in its futures positions. Furthermore, if in such circumstances the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. The Fund may have to sell such securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the SEC, the Fund may be required to segregate cash or other liquid assets in connection with its futures and options on futures transactions in an amount generally equal to the value of the underlying commodity. The segregation of such assets will have the effect of limiting the Fund's ability otherwise to invest those assets. To the extent that the Fund enters into futures contracts, options on futures contracts and options on foreign currencies traded on a CFTC-regulated exchange, that are not for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums required to establish these positions (excluding the amount by which options are "in-the-money" at the time of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio, after taking into account unrealized profits and unrealized losses on any contracts the Fund has entered into. (In general, a call option on a futures contract is "in-the-money" if the value of the underlying futures contract exceeds the exercise ("strike") price of the call; a put option on a futures contract is "in-the-money" if the value of the underlying futures contract is exceeded by the strike price of the put). This policy does not limit to 5% the percentage of the Fund's assets that are at risk in futures contracts, options on futures contracts and currency options. Specific Futures Transactions. The Fund may purchase and sell interest rate futures contracts. An interest rate future obligates the Fund to purchase or sell an amount of a specific debt security at a future date at a specific price. The Fund may purchase and sell currency futures. A foreign currency future obligates the Fund to purchase or sell an amount of a specific currency at a future date at a specific price. The Fund may purchase and sell stock index and debt futures contracts. An index future obligates the Fund to pay or receive an amount of cash equal to a fixed dollar amount specified in the futures contract multiplied by the difference between the settlement price of the contract on the contract's last trading day and the value of the index based on the prices of the securities that comprise it at the opening of trading in such securities on the next business day. The Fund may also purchase and sell options on interest rate, currency and index futures. When the Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the 23 futures contract at a specified exercise price at any time during the terms of the option. If the Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When the Fund purchases an option on a futures contract, it acquires the right, in return for the premium it pays, to assume a position in the futures contract (a long position if the option is a call and a short position if the option is a put). Forward Currency Contracts. The Fund may enter into forward currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (term) from the date of the forward currency contract agreed upon by the parties, at a price set at the time the forward currency contract is entered into. Forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers. The Fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Fund intends to acquire. The Fund may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security or a dividend or interest payment denominated in a foreign currency. The Fund may also use forward currency contracts to shift the Fund's exposure to foreign currency exchange rate changes from one currency to another. For example, if the Fund owns securities denominated in a foreign currency and DLJIM believes that currency will decline relative to another currency, it might enter into a forward currency contract to sell the appropriate amount of the first foreign currency with payment to be made in the second currency. The Fund may also purchase forward currency contracts to enhance income when DLJIM anticipates that the foreign currency will appreciate in value but securities denominated in that currency do not present attractive investment opportunities. The Fund may also use forward currency contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by entering into a forward currency contract to sell another currency expected to perform similarly to the currency in which the Fund's existing investments are denominated. This type of hedge could offer advantages in terms of cost, yield or efficiency, but may not hedge currency exposure as effectively as a simple hedge into U.S. dollars. This type of hedge may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated. The Fund may also use forward currency contracts in one currency or a basket of currencies to attempt to hedge against fluctuations in the value of securities denominated in a different currency if DLJIM anticipates that there will be a correlation between the two currencies. The cost to the Fund of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When the Fund enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of some or all of any expected benefit of the transaction. Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Fund will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, the Fund might be unable to close out a forward currency contract. In either event, the Fund would continue to be subject to market risk with respect to the position, and would continue to be required to maintain a position in securities denominated in the foreign currency or to maintain cash or liquid assets in a segregated account. The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward currency contract has been established. Thus, the Fund might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Interest Rate Swaps. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest (for example, an exchange of floating rate payments for fixed rate payments). The exchange commitments can involve payments to be made in the same currency or in different currencies. The use of interest rate swaps is a highly specialized activity that involves investment techniques and 24 risks different from those associated with ordinary portfolio security transactions. If DLJIM is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these investment techniques were not used. Moreover, even if DLJIM is correct in its forecasts, there is a risk that the swap position may correlate imperfectly with the price of the asset or liability being hedged. There is no limit on the amount of interest rate swap transactions that may be entered into by the Fund. These transactions do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that the Fund is contractually obligated to make. If the other party to an interest rate swap defaults, the Fund's risk of loss consists of the net amount of interest payments that the Fund contractually is entitled to receive. Credit Derivatives. The Fund may engage in credit derivative transactions. There are two broad categories of credit derivatives: default price risk derivatives and market spread derivatives. Default price risk derivatives are linked to the price of reference securities or loans after a default by the issuer or borrower, respectively. Market spread derivatives are based on the risk that changes in market factors, such as credit spreads, can cause a decline in the value of a security, loan or index. There are three basic transactional forms for credit derivatives: swaps, options and structured instruments. The use of credit derivatives is a highly specialized activity which involves strategies and risks different from those associated with ordinary portfolio security transactions. If DLJIM is incorrect in its forecasts of default risks, market spreads or other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these techniques were not used. Moreover, even if DLJIM is correct in its forecasts, there is a risk that a credit derivative position, may correlate imperfectly with the price of the asset or liability being hedged. There is no limit on the amount of credit derivative transactions that may be entered into by the Fund. The Fund's risk of loss in a credit derivative transaction varies with the form of the transaction. For example, if the Fund purchases a default option on a security, and if no default occurs with respect to the security, the Fund's loss is limited to the premium it paid for the default option. In contrast, if there is a default by the grantor of a default option, the Fund's loss will include both the premium that it paid for the option and the decline in value of the underlying security that the default option hedged. Options--In General. The Fund may purchase and write (i.e., sell) call or put options with respect to specific securities. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. A covered call option written by the Fund is a call option with respect to which the Fund owns the underlying security or otherwise covers the transaction by segregating cash or other liquid assets. A put option written by the Fund is covered when, among other things, cash or liquid assets having a value equal to or greater than the exercise price of the option are placed in a segregated account with the Fund's custodian to fulfill the obligation undertaken. The principal reason for writing covered call and put options is to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. The Fund receives a premium from writing covered call or put options which it retains whether or not the option is exercised. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain of the clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that may otherwise interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a covered call option writer, the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. Specific Options Transactions. The Fund may purchase and sell call and put options on foreign currency. These options convey the right to buy or sell the underlying currency at a price which is expected to be lower or higher than the spot price of the currency at the time the option is exercised or expires. The Fund may purchase and sell call and put options in respect of specific securities (or groups or "baskets" of specific securities) or indices listed on national securities exchanges or traded in the over-the-counter market. An option on an index is similar to an option in respect of specific securities, except that settlement does not occur 25 by delivery of the securities comprising the index. Instead, the option holder receives an amount of cash if the closing level of the index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. Thus, the effectiveness of purchasing or writing index options will depend upon price movements in the level of the index rather than the price of a particular security. The Fund also may purchase cash-settled options on swaps in pursuit of its investment objectives. A cash settled option on a swap gives the purchaser the right, but not the obligation, in return for the premium paid, to receive an amount of cash equal to the value of the underlying swap as of the exercise date. These options typically are purchased in privately negotiated transactions from financial institutions, including securities brokerage firms. Successful use by the Fund of options will be subject to the ability of DLJIM to predict correctly movements in the prices of individual securities, the securities markets generally, foreign currencies, or interest rates. To the extent such predictions are incorrect, the Fund may incur losses. Future Developments. The Fund may take advantage of opportunities in the area of options and futures contracts and options on futures contracts and any other Derivatives that are not presently contemplated for use by the Fund or that are not currently available but that may be developed, to the extent such opportunities are both consistent with the Fund's investment objectives and legally permissible for the Fund. Forward Commitments; When-Issued Securities The Fund may purchase securities on a forward commitment or when-issued basis, which means that delivery and payment take place a number of days after the date of the commitment to purchase. The payment obligation and the interest rate receivable on a forward commitment or when-issued security are fixed when the Fund enters into the commitment, but the Fund does not make payment until it receives delivery from the counterparty. The Fund will commit to purchase such securities only with the intention of actually acquiring the securities, but the Fund may sell these securities before the settlement date if it is deemed advisable. The Fund will set aside in a segregated account of the Fund permissible liquid assets at least equal at all times to the amount of the commitments. Securities purchased on a forward commitment or when-issued basis are subject to changes in value (generally changing in the same way, i.e., appreciating when interest rates decline and depreciating when interest rates rise) based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Securities purchased on a forward commitment or when-issued basis may expose the Fund to risks because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a when-issued basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. Purchasing securities on a forward commitment or when-issued basis when the Fund is fully or almost fully invested may result in greater potential fluctuation in the value of the Fund's net assets and its net asset value per Share. 26 RISK FACTORS Investors are advised to consider carefully the special risks involved in investing in the Fund. General The Fund is a newly organized, non-diversified, closed-end management investment company and has no operating history. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The Shares are designed primarily for long-term investors and should not be considered a vehicle for trading purposes. The net asset value of the Shares will fluctuate with interest rate changes as well as with price changes of the Fund's portfolio securities and these fluctuations are likely to be greater in the case of a fund having a leveraged capital structure, as contemplated for the Fund. Lower Grade Securities Lower grade securities are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Lower grade securities are commonly referred to as "junk bonds." Issuers of lower grade securities may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of lower grade securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During periods of economic downturn, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, the issuer's inability to meet specific projected business forecasts or the unavailability of additional financing. Therefore, there can be no assurance that in the future there will not exist a higher default rate relative to the rates currently existing in the market for lower grade securities. The risk of loss due to default by the issuer is significantly greater for the holders of lower grade securities because such securities may be unsecured and may be subordinate to other creditors of the issuer. Other than with respect to Distressed Securities, discussed below, the lower grade securities in which the Fund may invest do not include instruments which, at the time of investment, are in default or the issuers of which are in bankruptcy. However, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs. Lower grade securities frequently have call or redemption features that would permit an issuer to repurchase the security from the Fund. If a call were exercised by the issuer during a period of declining interest rates, the Fund is likely to have to replace such called security with a lower yielding security, thus decreasing the net investment income to the Fund and dividends to Shareholders. Lower grade securities have been in the past, and may again in the future be, more volatile than higher-rated fixed-income securities, so that adverse economic events may have a greater impact on the prices of lower grade securities than on higher-rated fixed income securities. Factors adversely affecting the market value of such securities are likely to affect adversely the Fund's net asset value. Recently, demand for lower grade securities has increased significantly and the difference between the yields paid by lower grade securities and investment grade bonds (i.e., the "spread") has narrowed. To the extent this differential increases, the value of lower grade securities in the Fund's portfolio could be adversely affected. Like higher-rated fixed-income securities, lower grade securities generally are purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in the lower grade securities market, which market may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for lower grade securities by various dealers. As a result, during periods of high demand in the lower grade securities market, it may be difficult to acquire lower grade securities appropriate for investment by the Fund. Adverse economic conditions and investor perceptions thereof (whether or not based on economic reality) may impair liquidity in the lower grade securities market and may cause the prices the Fund receives for its lower grade securities to be reduced. In addition, the Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as deterioration in the creditworthiness of the issuers. Under such conditions, judgment may play a greater role in valuing certain of the Fund's portfolio instruments than in the case of instruments trading in a more liquid market. In addition, the Fund may incur additional expense to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. 27 Distressed Securities As a component of the Fund's investment in "junk bonds," the Fund may invest up to 20% of its total assets in Distressed Securities. Investment in Distressed Securities is speculative and involves significant risk. Distressed Securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent the Fund pursues its secondary objective of capital appreciation through investment in Distressed Securities, the Fund's ability to achieve current income for Shareholders may be diminished. Smaller Companies in General The Fund may invest in smaller high yield issues which are those of companies whose total outstanding high yield debt is $100 million or less. Such smaller high yield issues may be issued by any company but are often issued by smaller companies. In addition to the general risks of such securities, those issued by smaller companies often have higher market risks associated with them. They may have limited product lines, markets, market share and financial resources, or they may be dependent on a small or inexperienced management team. In addition, their securities may be less liquid, have more limited volumes and be subject to greater and more abrupt price swings than securities of larger companies. Leverage The use of leverage by the Fund creates an opportunity for increased net income and capital appreciation for the Shares, but, at the same time, creates special risks, and there can be no assurance that a leveraging strategy will be successful during any period in which it is employed. The Fund intends to utilize leverage to provide the Shareholders with a potentially higher return. Leverage creates risks for Shareholders including the likelihood of greater volatility of net asset value and market price of the Shares and the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any preferred shares may affect the return to the Shareholders. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to Shareholders as dividends and other distributions will be reduced. In the latter case, DLJIM in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it deems such action to be appropriate under the circumstances. During periods in which the Fund is utilizing leverage, the Management Fee will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Managed Assets including those purchased with leverage. Certain types of borrowings by the Fund may result in the Fund's being subject to covenants in credit agreements, including those relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more Rating Agencies, which may issue ratings for the corporate debt securities or preferred shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. It is not anticipated that these covenants or guidelines will impede DLJIM in managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. Subject to applicable regulatory requirements, the Fund at times may borrow from affiliates of DLJIM, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. Foreign Securities The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside of the United States or that are denominated in various foreign currencies and multinational foreign currency units. Investing in securities of foreign entities and securities denominated in foreign currencies involves certain risks not involved in domestic investments, including, but not limited to, fluctuations in foreign exchange rates, future foreign political and economic developments, different legal and accounting systems and the possible imposition of exchange controls or other foreign governmental laws or restrictions. Securities prices in different countries are subject to different economic, financial, political and social factors. Since the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities in the Fund and the unrealized appreciation or depreciation of investments. Currencies of certain countries may be volatile and therefore may affect the value of securities denominated in such currencies. In addition, with respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, difficulty in obtaining or enforcing a court judgment, economic, political or social instability or diplomatic developments that 28 could affect investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain foreign investments also may be subject to foreign withholding taxes. These risks often are heightened for investments in smaller, emerging capital markets. As a result of these potential risks, DLJIM may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. The Fund may invest in countries in which foreign investors, including DLJIM, have had no or limited prior experience. Illiquid Securities The Fund may invest in securities for which no readily available market exists or are otherwise considered illiquid. The Fund may not be able readily to dispose of such securities at prices that approximate those at which the Fund could sell such securities if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Non-Diversified Status The Fund is classified as a "non-diversified" management investment company under the Investment Company Act, which means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a "diversified" management investment company. Accordingly, the Fund may be subject to greater risk with respect to its portfolio securities than a management investment company that is "diversified" because changes in the financial condition or market assessment of a single issuer may cause greater fluctuations in the net asset value of the Shares. Market Price, Discount and Net Asset Value of Shares Shares of closed-end management investment companies in the past frequently have traded at a discount from their net asset values. Whether investors will realize gains or losses upon the sale of Shares will not depend directly upon the Fund's net asset value, but will depend upon the market price of the Shares at the time of sale. Since the market price of the Shares will be determined by such factors as relative demand for and supply of the Shares in the market, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Shares will trade at, below or above the net asset value or at, below or above the initial offering price. The Shares are designed primarily for long-term investors, and investors in the Shares should not view the Fund as a vehicle for trading purposes. Anti-Takeover Provisions The Fund's Declaration of Trust contains provisions limiting (i) the ability of other entities or persons to acquire control of the Fund, (ii) the Fund's freedom to engage in certain transactions, and (iii) the ability of the Board or Shareholders to amend the Declaration of Trust. These provisions of the Declaration of Trust may be regarded as "anti-takeover" provisions. These provisions could have the effect of depriving the Shareholders of opportunities to sell their Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. Year 2000 Risks Like other investment companies, financial and business organizations and individuals around the world, the Fund could be adversely affected if the computer systems used by DLJIM and the Fund's other service providers do not properly process and calculate date-related information and data from and after January 1, 2000. This is commonly known as the "Year 2000 Problem." DLJIM is taking steps to address the Year 2000 Problem with respect to the computer systems that it uses and to obtain assurances that comparable steps are being taken by the Fund's other major service providers. At this time, however, there can be no assurance that these steps will be sufficient to avoid any adverse impact on the Fund. 29 INVESTMENT RESTRICTIONS In addition to its investment objectives, the Fund has adopted investment restrictions numbered 1 through 6 as fundamental policies, which cannot be changed without approval by the holders of a majority (as defined in the Investment Company Act) of the Fund's outstanding voting shares. Unless expressly designated as fundamental, all other policies of the Fund may be changed by the Board without Shareholder approval. The percentage restrictions set forth below, as well as those contained elsewhere in this Prospectus, apply at the time a transaction is effected, and a subsequent change in a percentage resulting from market fluctuations or any other cause other than an action by the Fund will not require the Fund to dispose of portfolio securities or take other action to satisfy the percentage restriction. The Fund may not: 1. Invest more than 25% of the value of its total assets in the securities of issuers in a single industry, provided that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 2. Invest in commodities or commodity contracts, except that the Fund may purchase and sell commodities to the maximum extent permitted by regulations of the CFTC (or any successor) that would not require registration of the Fund as a commodity pool. 3. Purchase, hold or deal in real estate, or oil, gas or other mineral leases or exploration or development programs, but the Fund may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. If real estate is delivered as a result of foreclosure, the Fund may hold such property until it can dispose of it in an orderly manner at a reasonable price. 4. Issue senior securities or borrow money except as permitted by the Investment Company Act. 5. Make loans to others, except through the purchase of debt obligations and the entry into repurchase agreements. However, the Fund may lend its portfolio securities in an amount not to exceed 331/3% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the SEC and the Board. 6. Act as an underwriter of securities of other issuers, except to the extent the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities. 7. Invest in the securities of a company for the purpose of exercising management or control, but the Fund will vote the securities it owns in its portfolio as a shareholder in accordance with its views. 8. Pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings or leverage and to the extent necessary related to the purchase of securities on a when-issued or forward commitment basis, the deposit of assets in escrow in connection with writing covered options, and collateral and initial or variation margin or similar arrangements with respect to options, forward contracts, futures contracts, options on futures contracts, swaps, caps, collars, floors and other derivative instruments. 30 MANAGEMENT OF THE FUND Investment Manager DLJIM, located at 277 Park Avenue, New York, New York 10172, was formed in 1996 and serves as the Fund's investment manager. DLJIM is a wholly-owned subsidiary of DLJ. As of June 30, 1998, aggregate assets under the management of DLJIM exceeded $5 billion. As of June 30, 1998, DLJAM, which includes DLJIM, managed or administered assets of approximately $17 billion. DLJ, a member of the New York Stock Exchange, is a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ, Inc."), a major international supplier of financial services. DLJ, Inc. is an independently operated, indirect subsidiary of The Equitable Companies Incorporated, a holding company controlled by AXA-UAP ("AXA"), a member of a large French insurance group. AXA is indirectly controlled by a group of four French mutual insurance companies. DLJIM supervises and assists in the overall management of the Fund's affairs under an investment management agreement with the Fund, subject to the authority of the Board in accordance with Delaware law. The Fund's primary portfolio manager is Lars M. Berkman. Mr. Berkman has been employed by DLJIM as Senior Vice President and Director of High Yield Investments since March 1998. Previously, Mr. Berkman spent 19 years at The Prudential Insurance Company of America ("Prudential"), most recently as Managing Director in charge of High Yield in Prudential Investments, the investment management subsidiary of Prudential. In that capacity, Mr. Berkman managed a $4.5 billion high yield mutual fund and supervised the management of seven other high yield portfolios for pension and mutual fund clients. In 1997, the class A shares of the high yield mutual fund managed by Mr. Berkman carried a Morningstar rating of 5 stars for the risk and return profile over the last five years. Before that, Mr. Berkman worked in various investment management business units at Prudential, primarily involved in leveraged buyout investing. In selecting investments for the Fund's portfolio, DLJIM will seek to identify issuers and industries that DLJIM believes are likely to experience stable or improving financial conditions. DLJIM believes that this strategy should enhance the Fund's ability to earn high current income while also providing opportunities for capital appreciation. DLJIM's analysis may include consideration of general industry trends, the issuer's managerial strength, market position, financial condition, debt maturity schedules and liquidity. DLJIM may also consider relative values based on cash flow, interest or dividend coverage, asset coverage and earnings prospects. The Fund will seek its secondary objective of capital appreciation by investing in securities that DLJIM expects may appreciate in value as a result of favorable developments affecting the business or prospects of the issuer which may improve the issuer's financial condition and credit rating or as a result of declines in long-term interest rates. There can be no assurance the Fund's strategies will be successful. DLJIM and its affiliates may sponsor and advise new investment vehicles with investment objectives, policies and restrictions similar or identical to those of the Fund. Management and Administration Agreements DLJIM provides investment management services pursuant to the Investment Management Agreement (the "Management Agreement") dated July 27, 1998 with the Fund. As compensation for DLJIM's management services to the Fund, the Fund has agreed to pay DLJIM a Management Fee at the annual rate of 1% of the value of the Managed Assets. During the period in which the Fund is utilizing leverage, the Management Fee payable to DLJIM will be higher than if the Fund did not utilize a leveraged capital structure because the fees are calculated as a percentage of the Managed Assets, including those purchased with leverage. A majority of the Trustees who are not "interested persons" shall monitor and resolve any potential conflict that exists regarding DLJIM and the calculation of its fees as described herein. The Management Agreement is subject to annual approval by (i) the Fund's Board or (ii) vote of a majority (as defined in the Investment Company Act) of the outstanding voting securities of the Fund, provided that in either event the continuance is also approved by a majority of the Board members who are not "interested persons" (as defined in the Investment Company Act) of the Fund or DLJIM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Management Agreement was approved by the Fund's Board, including a majority of the Board members who are not "interested persons" of any party to the Management Agreement, at a meeting held on July 16, 1998. The Management Agreement was approved by the Fund's initial shareholder on July 16, 1998. The Management Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board or by vote of the holders of a majority of the Shares, or, on not less than 90 days' notice, by DLJIM. The Management Agreement will terminate automatically in the event of its 31 assignment (as defined in the Investment Company Act). First Data provides administration services to the Fund pursuant to the Services Agreement (the "Administration Agreement") dated July 27, 1998 with the Fund. As compensation for First Data's administration services to the Fund, the Fund has agreed to pay an Administration Fee at the rate of $50,000 per year. DLJIM manages the Fund's investments in accordance with the stated policies of the Fund, subject to the approval of the Fund's Board. DLJIM is responsible for investment decisions, and provides the Fund with portfolio managers who are authorized by the Board to execute purchases and sales of securities. DLJIM and its affiliates also maintain a research department with a professional staff of portfolio managers and securities analysts who provide research services for the Fund as well as for other funds and investment advisory clients advised by DLJIM and its affiliates. DLJIM and its affiliates may have deposit, loan and commercial banking or other relationships with the issuers of securities purchased by the Fund. DLJIM has informed the Fund that in making its investment decisions it does not obtain or use material non-public information that DLJ, or its affiliates, may possess with respect to such issuers. DLJIM maintains office facilities on behalf of the Fund, and furnishes statistical, and research data, clerical help, accounting, data processing, bookkeeping and internal auditing and certain other required services to the Fund for which it may be reimbursed. DLJIM also may make such advertising and promotional expenditures, using its own resources, as it deems appropriate. Expenses All expenses incurred in the operation of the Fund are borne by the Fund, except to the extent specifically assumed by DLJIM. The expenses borne by the Fund include: organizational costs, taxes, interest, brokerage fees and commissions, if any, fees of Board members who are not officers, trustees, employees or holders of 5% or more of the outstanding voting securities of DLJIM or any of its affiliates, SEC fees, state Blue Sky qualification fees, exchange listing fees, advisory and administration fees, shareholder servicing fees, charges of custodians, transfer and dividend disbursing agents' fees, certain insurance premiums, industry association fees, outside auditing and legal expenses, costs of maintaining the Fund's existence, expenses of reacquiring Shares, expenses in connection with the Fund's Automatic Dividend Reinvestment Plan, costs of maintaining the required books and accountings (including the costs of calculating the net asset value of the Shares), costs of independent pricing services, costs attributable to investor services (including, without limitation, telephone and personnel expenses), a pro rata portion of certain employment costs for time spent on Fund operations (other than the provision of investment advice) of personnel employed by the Adviser who devote substantial time to Fund operations, costs of preparing and printing prospectuses, and mailing Share certificates, proxy statements and costs of Shareholders' reports and meetings, any extraordinary expenses and other expenses properly payable by the Fund. 32 TRUSTEES AND OFFICERS OF THE FUND The Board is composed of five Trustees who supervise the Fund's investment activities and review contractual arrangements with companies that provide the Fund with services. The following lists the Trustees and officers and their positions with the Fund and their present and principal occupations during the past five years. Each Trustee who is an "interested person" of the Fund (as defined in the Investment Company Act) is indicated by an asterisk (*). Each Trustee who is not an "interested person" serves on the Audit Committee of the Board. Each Trustee serves as a trustee for registered investment companies which are affiliates of the Fund and DLJAM. *G. Moffett Cochran, 47, Chairman of the Board and President of the Fund, is Chairman of DLJAM, with which he has been associated since prior to 1993. Prior to his association with the Fund and DLJAM, Mr. Cochran was a Senior Vice President with Bessemer Trust Companies. Robert E. Fischer, 68, Trustee of the Fund, has been a partner at the law firm of Wolf, Block, Schorr and Solis-Cohen LLP (or its predecessor firm) since prior to 1993. *Martin Jaffe, 51, Trustee, Vice President, Secretary and Treasurer of the Fund, is Chief Operating Officer of DLJAM, with which he has been associated since prior to 1993. Wilmot H. Kidd, III, 56, Trustee of the Fund, has been President of Central Securities Corporation since prior to 1993. John W. Waller, III, 46, Trustee of the Fund, has been Chairman of Waller Capital Corporation, an investment banking firm, since prior to 1993. Lars M. Berkman, 49 , Vice President of the Fund, has been associated with DLJAM since March 1998. Prior to his association with DLJAM, Mr. Berkman was a Managing Director with Prudential since prior to 1993. Brian Kammerer, 40, Vice President of the Fund, has been associated with DLJAM since prior to 1993. The address of each officer of the Fund is 277 Park Avenue, New York, New York 10172. The officers and Trustees of the Fund as a group owned beneficially less than 1% of the total Shares of the Fund outstanding as of July 27, 1998. No officer or employee of the Fund receives any compensation from the Fund for serving as an officer or Trustee of the Fund. The Fund pays each Trustee who is not an "interested person" $2,000 per Board meeting attended, $1,000 per audit committee meeting attended and reimbursement for travel and out-of-pocket expenses. (Interested persons indicated by an asterisk (*).) Compensation Table
Total Compensation Pension or from the Aggregate Retirement Benefits Estimated Fund Complex Compensation Accrued as Part Annual Benefits Paid to Board Name of Board Member from Fund(1) of Fund Expenses upon Retirement Member - --------------------------------------- -------------- --------------------- ----------------- -------------- G. Moffett Cochran*, Trustee ......... $ 0 None None $ 0 Robert E. Fischer, Trustee ........... 10,000 None None 20,000 Martin Jaffe*, Trustee ............... 0 None None 0 Wilmot H. Kidd, III, Trustee ......... 10,000 None None 20,000 John W. Waller, III, Trustee ......... 10,000 None None 20,000
(1) The Fund anticipates paying each independent Trustee approximately $10,000 in each calendar year. 33 PORTFOLIO TRANSACTIONS DLJIM assumes general supervision over placing orders on behalf of the Fund for the purchase or sale of portfolio securities. Allocation of brokerage transactions, including their frequency is made in the best judgment of DLJIM and in a manner deemed fair and reasonable to Shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement DLJIM's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by DLJIM and DLJIM's fees are not reduced as a consequence of the receipt of such supplemental information. Such information may be useful to DLJIM in serving both the Fund and other investment advisory clients and funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to DLJIM in carrying out its obligations to the Fund. In allocating brokerage transactions, DLJIM seeks to obtain the best execution of orders at the most favorable net price. Subject to this determination, DLJIM may consider, among other things, the receipt of research services and/or the sale of other funds managed, advised or administered by DLJIM or its affiliates as factors in the selection of broker-dealers to execute portfolio transactions for the Fund. The Fund has no obligation to deal with any broker or dealer in execution of transactions. While DLJIM generally seeks reasonably competitive fees, commissions or spreads, the Fund does not necessarily pay the lowest fee, commission or spread available. DLJIM may allocate brokerage transactions to DLJ pursuant to procedures adopted by the Board which comply with the Investment Company Act. Such procedures state that any commissions charged by DLJ will be fair and reasonable and will not exceed DLJ's usual and customarily charged commissions. Securities in which the Fund may invest are traded primarily in the over-the-counter markets, and the Fund intends to deal directly with the dealers who make markets in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Because of the affiliation of DLJ with the Fund, the Fund is prohibited from engaging in certain transactions involving DLJ and its affiliates except pursuant to an exemptive order or otherwise in compliance with the provisions of the Investment Company Act and the rules and regulations promulgated thereunder. Included among such restricted transactions will be purchases from or sales to DLJ and its affiliates of securities in transactions in which it acts as principal. In addition, the Fund is prohibited from engaging in any transaction in which DLJIM may possess, or has access to through DLJ, material non-public information. DLJIM believes that these restrictions will not materially inhibit the ability of the Fund to seek to achieve its investment objectives. The Fund may purchase securities for the Fund during the existence of any underwriting syndicate of which DLJ is a member pursuant to procedures approved by the Board which comply with the rules adopted by the SEC. Brokers will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. Large block trades may, in certain cases, result from two or more funds or investment advisory clients advised by DLJIM or its affiliates being engaged simultaneously in the purchase or sale of the same security. Certain of the Fund's transactions in securities of foreign issuers may not benefit from the negotiated commission rates available to the Fund for transactions in securities of domestic issuers. When transactions are executed in the over-the-counter market, the Fund will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Foreign exchange transactions are made with banks or institutions in the interbank market at prices reflecting a mark-up or mark-down and/or commission. Portfolio turnover may vary from year to year as well as within a year. It is anticipated that in any fiscal year the turnover rate may approach the 300% level for the Fund. In periods in which extraordinary market conditions prevail, DLJIM will not be deterred from changing the Fund's investment strategy as rapidly as needed, in which case higher turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by DLJIM based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. A turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of a year. Higher portfolio turnover rates usually generate additional brokerage commissions and expenses, and the short-term gains realized from these transactions are taxable to Shareholders as ordinary income when distributed to them. Investment decisions for the Fund are made independently from those of other investment companies and investment advisory clients advised by DLJIM. If, however, such other investment companies or investment 34 advisory clients desire to invest in, or dispose of, the same securities as the Fund, available investments or opportunities for sales will be allocated equitably to each investment company and investment advisory client. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Fund or the price paid or received by the Fund. Securities held by the Fund also may be held by or be appropriate investments for other funds or investment advisory clients for which DLJIM or an affiliate acts as an adviser. Because of different investment objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for the Fund or other funds for which DLJIM or an affiliate acts as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. 35 DETERMINATION OF NET ASSET VALUE The Fund's investments are valued after the close of regular trading on the New York Stock Exchange on the Thursday of each week and the last business day of each month, using available market quotations or at fair value. For purposes of determining the net asset value, the value of the securities held by the Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued expenses) is divided by the total number of Shares outstanding at such time. The Fund determines and makes available for publication the net asset value of its Shares weekly. Currently, the net values of shares of publicly traded closed-end investment companies investing in debt securities are published in Barron's, the Monday edition of The Wall Street Journal and the Monday and Saturday editions of The New York Times. Substantially all of the Fund's investments (excluding short-term investments) are valued by one or more independent pricing services (the "Service") approved by the Board. Securities valued by the Service for which quoted bid prices in the judgment of the Service are readily available and are representative of the bid side of the market are valued at the mean between the quoted bid prices (as obtained by the Service from dealers in such securities) and asked prices (as calculated by the Service based upon its evaluation of the market for such securities). Other investments valued by the Service are carried at fair value as determined by the Service, based on methods which include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. Debt securities which mature in less than 60 days are valued at amortized cost (unless the Board determines that this method does not represent fair value), if their original maturity was 60 days or less or by amortizing the value as of the 61st day prior to maturity, if their original term to maturity exceeded 60 days. Other investments that are readily marketable portfolio securities listed on an exchange are valued at the last sale price at the close of the exchange on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices on such day. If no bid or asked prices are quoted on such day, then the security is valued by such method as the Board shall determine in good faith to reflect its fair value. Readily marketable securities, including certain options, not listed on an exchange but admitted to trading on the National Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ") National List (the "List") are valued in like manner. Portfolio securities traded on more than one exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. Readily marketable securities, including certain options traded only in the over-the-counter market and listed securities whose primary market is believed by DLJIM to be over-the-counter (excluding those admitted to trading on the List) are valued at the mean of the current bid and asked prices as reported by such sources as the Board deem appropriate to reflect their fair market value. Options, futures contracts and options thereon which are traded on exchanges are valued at their last sale or settlement price as of the close of the exchanges or, if no sales are reported, at the average of the quoted bid and asked prices as of the close of the exchange. Portfolio securities underlying listed call options will be valued at their market price and reflected in net assets accordingly. Premiums received on call options written by the Fund will be included in the liability section of the financial statements as a deferred credit and subsequently adjusted (marked-to-market) to the current market value of the option written. Any assets or liabilities initially expressed in terms of foreign currency will be translated into U.S. dollars at the prevailing rates of exchange or, if no such rate is quoted on such date, at the exchange rate utilized on the previous business day or at such other quoted market exchange rate as may be determined to be appropriate by DLJIM. Expenses and fees, including the Management Fee, are accrued weekly and taken into account for the purpose of determining the net asset value of the Shares. Securities that are not valued by the Service are valued at fair value as determined in good faith by the Board utilizing such factors as the Board deems appropriate. The Board will review the method of such valuations on a current basis. The holidays (as observed) on which the New York Stock Exchange is closed currently are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. 36 DIVIDENDS AND OTHER DISTRIBUTIONS The Fund intends to distribute substantially all of its net investment income monthly. All net realized capital gains, if any, are expected to be distributed to the Shareholders at least annually. The Fund will distribute to the Shareholders at least annually all net realized gains from foreign currency transactions, if any. The Fund may make additional distributions if necessary to avoid a 4% excise tax on certain undistributed income and capital gain. See "Taxes." The Fund may change the foregoing distribution policy if its experience indicates, or its Board for any reason determines, that changes are desirable. Under the Investment Company Act, the Fund is not permitted to incur indebtedness unless after such incurrence the Fund has an asset coverage of at least 300% of the aggregate outstanding principal balance of indebtedness. Additionally, under the Investment Company Act, the Fund may not declare any dividend or other distribution upon any class of its capital shares, or purchase any such capital shares, unless the aggregate indebtedness of the Fund has, at the time of the declaration of any such dividend or other distribution or at the time of any such purchase, an asset coverage of at least 300% after deducting the amount of such dividend, other distribution, or purchase price, as the case may be. While any preferred shares are outstanding, the Fund may not declare any cash dividend or other distribution on Shares, unless at the time of such declaration, (1) all accumulated preferred share dividends have been paid and (2) the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of the liquidation value of the outstanding preferred shares (expected to be equal to the original purchase price per share plus any accumulated and unpaid dividends thereon). In addition to the limitations imposed by the Investment Company Act as described in this paragraph certain lenders may impose additional restrictions on the payment of dividends or other distributions on the Shares in the event of a default on the Fund's borrowings. Any limitation on the Fund's ability to make distributions on Shares could in certain circumstances impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company. See "Other Investment Practices--Leverage" and "Taxes." See "Automatic Dividend Reinvestment Plan" for information concerning the manner in which dividends and other distributions to Shareholders may be automatically reinvested in Shares of the Fund. Dividends and other distributions will be taxable to Shareholders whether they are reinvested in Shares of the Fund or received in cash. The Fund expects that it will commence paying dividends approximately 60 days after the completion of the offering of the Shares. 37 AUTOMATIC DIVIDEND REINVESTMENT PLAN Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"), unless a Shareholder otherwise elects, all dividends and capital gain distributions will be automatically reinvested by First Data as agent for Shareholders in administering the Plan (the "Plan Agent"), in additional Shares of the Fund. Shareholders who elect not to participate in the Plan will receive all dividends and other distributions in cash paid by check mailed directly to the Shareholder of record (or, if the Shares are held in street or other nominee name, then to such nominee) by First Data as the Dividend Disbursing Agent. Such participants may elect not to participate in the Plan and to receive all dividends and capital gain distributions in cash by sending written instructions to First Data, as the Dividend Disbursing Agent, at the address set forth below. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by written notice if received by the Plan Agent not less than ten days prior to any dividend record date; otherwise such termination will be effective with respect to any subsequently declared dividend or other distribution. Whenever the Fund declares an income dividend or a capital gain distribution (collectively referred to as "dividends") payable either in Shares or in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Shares. The Shares will be acquired by the Plan Agent for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Shares from the Fund ("newly issued Shares") or (ii) by purchase of outstanding Shares on the open market ("open-market purchases") on the NYSE or elsewhere. If on the record date for the dividend, the net asset value per Share is equal to or less than the market price per Share plus estimated brokerage commissions (such condition being referred to herein as "market premium"), the Plan Agent will invest the dividend amount in newly issued Shares on behalf of the participants. The number of newly issued Shares to be credited to each participant's account will be determined by dividing the dollar amount of the dividend by the net asset value per Share on the date the Shares are issued. If on the dividend record date the net asset value per Share is greater than the market value (such condition being referred to herein as "market discount"), the Plan Agent will invest the dividend amount in Shares acquired on behalf of the participants in open-market purchases. In the event of a market discount on the dividend record date, the Plan Agent will have until the last business day before the next date on which the Shares trade on an "ex-dividend" basis or in no event more than 30 days after the dividend record date (the "last purchase date") to invest the dividend amount in Shares acquired in open-market purchases. It is contemplated that the Fund will pay monthly income dividends. Therefore, the period during which open-market purchases can be made will exist only from the record date of the dividend through the date before the next "ex-dividend" date which typically will be approximately ten days. If, before the Plan Agent has completed its open-market purchases, the market price of a Share exceeds the net asset value per Share, the average per Share purchase price paid by the Plan Agent may exceed the net asset value of the Shares, resulting in the acquisition of fewer Shares than if the dividend had been paid in newly issued Shares on the dividend record date. Because of the foregoing difficulty with respect to open market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent may cease making open-market purchases and may invest the uninvested portion of the dividend amount in newly issued Shares at the net asset value per Share at the close of business on the last purchase date. The Plan Agent maintains all Shareholders' accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by Shareholders for tax records. Shares in the account of each Plan participant will be held by the Plan Agent on behalf of the Plan participant, and each Shareholder proxy will include those Shares purchased or received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for Shares held pursuant to the Plan in accordance with the instructions of the participants. In the case of Shareholders such as banks, brokers or nominees that 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 record Shareholder and held for the account of beneficial owners who participate in the Plan. There will be no brokerage charges with respect to Shares issued directly by the Fund as a result of dividends or capital gains distributions payable either in Shares or in cash. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open-market purchases in connection with the reinvestment of dividends. The automatic reinvestment of dividends will not relieve participants of any Federal, state or local income tax that may be payable (or required to be withheld) on such dividends. See "Taxes." 38 Shareholders participating in the Plan may receive benefits not available to Shareholders not participating in the Plan. If the market price (plus commissions) of the Shares is above their net asset value, participants in the Plan will receive Shares of the Fund at less than they could otherwise purchase them and will have Shares with a cash value greater than the value of any cash distribution they would have received on their Shares. If the market price plus commissions is below the net asset value, participants will receive distributions in Shares with a net asset value greater than the value of any cash distribution they would have received on their Shares. However, there may be insufficient Shares available in the market to make distributions in Shares at prices below the net asset value. Also, since the Fund does not redeem Shares, the price on resale may be more or less than the net asset value. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. All correspondence concerning the Plan should be directed to the Plan Agent at P.O. Box 8030, Boston, MA 02266-8030, 1-800-331-1710. 39 TAXES The following discussion is a general summary of certain U.S. federal income tax considerations relating to the Fund and to an investment in the Shares of the Fund. The discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations and administrative rulings and pronouncements of the Internal Revenue Service, all as in effect on the date hereof and which are subject to change, possibly retroactively. This summary does not purport to discuss all of the income tax consequences applicable to the Fund or to all categories of investors, some of whom may be subject to special rules (including dealers in securities, insurance companies, tax-exempt entities and non-U.S. persons). Prospective investors are urged to consult their tax advisors regarding the federal income tax consequences of ownership of the Shares of the Fund, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. For purposes of the following discussion, a Non-U.S. Shareholder is a Shareholder who is not (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized under the laws of the United States or any state thereof, (iii) an estate, the income of which is subject to United States federal income taxation regardless of its source, (iv) a trust (a) the administration over which a United States court can exercise primary supervision and (b) all of the substantial decisions of which one or more United States persons have the authority to control, or (v) a Shareholder who is otherwise subject to United States federal income taxation on a net income basis in respect of the Shares. Tax Status The Fund intends to elect to be, and to qualify to be treated as, a regulated investment company ("RIC") under the Code. For each taxable year that the Fund so qualifies, the Fund (but not Shareholders) will be relieved of federal income tax on that part of its investment company taxable income (consisting generally of net investment income, net short-term capital gain and net gains from certain foreign currency transactions) and net capital gain that is distributed to Shareholders. In order to qualify for treatment as a RIC under the Code, the Fund must make an election to be so treated and must distribute to Shareholders for each taxable year at least 90% of its investment company taxable income ("Distribution Requirement") and must meet several additional requirements. These requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in securities or those currencies ("Income Requirement"); (2) at the close of each quarter of the Fund's taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities that are limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund's total assets and that does not represent more than 10% of the issuer's outstanding voting securities; and (3) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of its total assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same or related trades or businesses. The Fund will be subject to a non-deductible 4% excise tax ("Excise Tax") to the extent that it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31st of that year, plus certain other amounts. For these purposes, any such income retained by the Fund, and on which it pays federal income tax, will be treated as having been distributed. Nature of the Fund's Investments Some of the investment practices that may be employed by the Fund will be subject to special provisions that, among other things, may defer the use of certain losses of the Fund and affect the holding period of the securities held by the Fund and, particularly in the case of transactions in or with respect to foreign currencies, the character of the gains or losses realized. These provisions may also require the Fund to mark-to-market some of the positions in its portfolio (i.e., treat as sold for their fair market value) or to accrue original issue discount, both of which may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the Distribution Requirement and avoid imposition of the Excise Tax. Moreover, the Fund will be required to include in its gross income each year any "interest" distributed in the form of additional securities on payment-in-kind securities. In order to satisfy the Distribution Requirement and avoid the Excise Tax, the Fund may be required to liquidate portfolio securities or borrow funds. The Fund intends to monitor its transactions and may make certain elections in order to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company. 40 The Fund intends to invest in, among other things, foreign securities. If, in connection with such investments, the Fund owns shares of stock in certain foreign investment entities, referred to as passive foreign investment companies ("PFICs"), the Fund may be subject to U.S. federal income tax, and additional charges in the nature of interest, on a portion of any "excess distribution" from such company or gain from the disposition of such shares, even if the entire distribution or gain is distributed by the Fund to Shareholders. If the Fund were able and elected to treat a PFIC as a "qualified electing fund," in lieu of the treatment described above, the Fund would be required each year to include in income, the Fund's pro rata share of the ordinary earnings and net capital gains of the company, whether or not actually received by the Fund. Newly enacted provisions of the Code would each allow certain regulated investment companies to elect to mark-to-market their stock in certain PFICs at the end of each taxable year, whereby the Fund would include in its taxable income each year any unrealized gain on such PFIC investments. In order to satisfy the Distribution Requirement under either election, maintain its qualification as a regulated investment company, and avoid income taxes and the Excise Tax, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold. In the case of the proposed Treasury Regulations, there can be no assurance that these regulations will be finalized in the form proposed or as to the effective date of any such final regulations. Income received by the Fund from investments in foreign securities may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions. Such taxes will not be deductible or creditable by Shareholders (but may be deductible by the Fund), and may be withheld at a higher rate than that which would be applicable if the underlying securities had been held directly by a Shareholder. Tax conventions between certain countries and the United States may reduce or eliminate those taxes. Taxation of Shareholders Dividends from the Fund's investment company taxable income (whether received in cash or reinvested in additional Fund Shares) generally are taxable to Shareholders as ordinary income. Distributions of the Fund's net capital gain (whether received in cash or reinvested in additional Fund Shares), when designated as such, are taxable to Shareholders as long-term capital gain, regardless of how long they have held their Fund Shares. See below for a summary of the tax rates applicable to capital gain distributions. A participant in the Automatic Dividend Reinvestment Plan will be treated as having received a distribution in the amount of the cash used to purchase Shares on his or her behalf, including a pro rata portion of the brokerage fees incurred by the Transfer Agent. Distributions by the Fund to Shareholders in any year that exceed the Fund's earnings and profits generally may be applied by each Shareholder against his or her basis for the Shares and will be taxable at capital gains rates (assuming the Shares are held as capital assets) to any Shareholder only to the extent the distributions to the Shareholder exceed the Shareholder's basis for his or her Shares. The Fund may retain for investment its net capital gain. However, if the Fund does so, it will be subject to a tax of 35% on the amount retained. In that event, the Fund expects to designate the retained amount as undistributed capital gain in a notice to Shareholders, who (i) will be required to include in income for tax purposes, as long-term capital gain, their proportionate shares of such undistributed amount, (ii) will be entitled to credit their proportionate shares of the 35% tax paid by the Fund against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds those liabilities, and (iii) will increase the tax basis of their Fund Shares by an amount equal to the difference between the amount of undistributed capital gain included in their gross income and the tax deemed paid by such Shareholders. The Fund will notify Shareholders following the end of each calendar year of the amounts of dividends and capital gain distributions paid (or deemed paid) that year and undistributed capital gain designated for that year. The information regarding capital gain distributions and undistributed capital gain will designate the portion thereof subject to the different maximum rates of tax applicable to noncorporate taxpayers' net capital gain indicated below. Dividends and other distributions declared by the Fund in October, November or December of any year and payable to Shareholders of record on a specified date in such a month will be deemed to have been paid by the Fund and received by the Shareholders on December 31st if the distributions are paid by the Fund during the following January. Accordingly, those distributions will be taxed to Shareholders for the year in which that December 31st falls. An investor should be aware that, if Shares are purchased shortly before the record date for any dividend or other distribution, the investor will pay full price for the Shares and will receive some portion of the purchase price back as a taxable distribution. Upon the sale or exchange of Shares (including a sale pursuant to a Share repurchase or tender offer by the Fund), a Shareholder generally will recognize a taxable gain or loss equal to the difference between his or her adjusted basis for the Shares and the amount received. Any such gain or loss will be treated as a capital gain or 41 loss if the Shares constitute capital assets in the Shareholder's hands and will be long-term capital gain or loss if the Shares have been held for more than one year. See below for a discussion of the tax rates applicable to capital gains. Any loss recognized on a sale or exchange of Shares that were held for six months or less will be treated as long-term, rather than short-term, capital loss to the extent of any capital gain distributions previously received (or deemed to be received) thereon. A loss realized on a sale or exchange of Shares will be disallowed to the extent those Shares are replaced by other Shares within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the Shares (which could occur, for example, as a result of participation in the Automatic Dividend Reinvestment Plan). In that event, the basis of the replacement Shares will be adjusted to reflect the disallowed loss. Under the Taxpayer Relief Act of 1997 ("1997 Tax Act"), the maximum tax rates applicable to net capital gains recognized by individuals and other non-corporate taxpayers are generally (i) the same as ordinary income tax rates for capital assets held for one year or less; (ii) 28% for capital assets held for more than one year but not more than 18 months and (iii) 20% (10% for taxpayers in the 15% marginal tax bracket) for capital assets held for more than 18 months. The 1997 Tax Act did not affect the maximum net capital gain tax rate for corporations, which remains at 35%. The tax rates described above will apply to distributions of net capital gain by the Fund (if, as expected, the Fund designates net capital gain distributions as 28% rate gain distributions or 20% rate gain distributions, in accordance with its holding periods for the securities it sold that generated the distributed gains) as well as to sales and exchanges of Shares. With respect to capital losses recognized on dispositions of Shares held six months or less where such losses are treated as long-term capital losses to the extent of prior capital gain distributions received thereon (see discussion in the preceding paragraph), it is unclear how such capital losses offset the capital gains referred to above. Shareholders should consult their own tax advisers as to the application of the new capital gains rates to their particular circumstances. Back-up Withholding The Fund is required to withhold 31% of all dividends, capital gain distributions and repurchase proceeds payable to any individual Shareholders and certain other non-corporate Shareholders who do not provide the Fund with a correct taxpayer identification number. The Fund is also required to withhold 31% of all dividends and capital gain distributions payable to such Shareholders who otherwise are subject to backup withholding. Non-U.S. Shareholders The foregoing discussion relating to taxation of Shareholders applies to Non-U.S. Shareholders except to the extent provided below. A Non U.S. Shareholder generally will be subject to withholding of United States federal income tax at a 30% rate (or lower applicable treaty rate) on dividends from the Fund (other than capital gain distributions) unless the dividends are (i) "effectively connected" with a United States trade or business carried on by such Shareholder or (ii), under certain income tax treaties, attributable to a permanent establishment in the United States maintained by such Non-U.S. Shareholder, in which case such dividends will be subject to United States federal income tax on a net income basis in the same manner as if such Non-U.S. Shareholder were a resident of the United States (and with respect to corporate holders, also may be subject to an additional branch profits tax). Accordingly, investment in the Fund is likely to be appropriate for a Non-U.S. Shareholder only if such person can utilize a foreign tax credit or corresponding tax benefit in respect of such United States withholding tax. A Non-U.S. Shareholder generally will not be subject to United States federal income tax on capital gain distributions and gains realized from the sale of Shares unless (i) such Non-U.S. Shareholder is an individual and is present in the United States for more than 182 days during the taxable year (assuming that certain other conditions are met) or (ii) the gain is either (a) effectively connected with the conduct of a United States trade or business of such Non-U.S. Shareholder or (b), if an applicable treaty provides, attributable to a permanent establishment in the United States maintained by such Non-U.S. Shareholder. Gain that is either (a) effectively connected with the conduct of a United States trade or business of a Non-U.S. Shareholder or (b), if an applicable tax treaty provides, attributable to a permanent establishment in the United States maintained by the Non-U.S. Shareholder will be subject to United States federal income tax on a net income basis in the same manner as if such Non-U.S. Shareholder were a resident of the United States, and in the case of a corporation, may be subject to an additional branch profits tax. Under temporary United States Treasury regulations, United States information reporting requirements and backup withholding tax generally will not apply to dividends paid to a Non-U.S. Shareholder at an address outside the United States. Under certain circumstances, capital gain distributions and proceeds from the sale of Shares paid to a Non-U.S. Shareholder may be subject to the information reporting requirements and backup withholding at 42 the rate of 31% unless such Non-U.S. Shareholder certifies as to its Non-U.S. Shareholder status under penalties of perjury or otherwise establishes an exemption. The United States Treasury Department recently issued final Treasury regulations generally effective for payments made after December 31, 1999 concerning the withholding of tax and information reporting for certain amounts paid to Non-U.S. Shareholders (the "Final Withholding Regulations"). Among other things, the Final Withholding Regulations may require Non-U.S. Shareholders to furnish new certification of their foreign status after December 31, 1999. Prospective investors should consult their tax advisors concerning the applicability and effect of the Final Withholding Regulations on an investment in Shares. The tax consequences to Non-U.S. Shareholders entitled to claim the benefits of an applicable tax treaty may be different from those described in this summary. Non-U.S. Shareholders 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 tax advisors with respect to the tax implications of purchasing, holding and disposing of Shares. General The foregoing is only a brief summary of some of the important federal income tax considerations generally affecting the Fund and Shareholders. There may be other federal, state, local or foreign tax considerations applicable to a particular investor. Prospective investors are urged to consult their tax advisers regarding the specific federal income tax consequences of purchasing, holding and disposing of Shares, as well as the effects of state, local and foreign tax laws and any proposed tax law changes. 43 UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement, dated July 27, 1998 (the "Underwriting Agreement"), the Underwriters named below, who are represented by DLJ (the "Representative"), have severally agreed to purchase from the Fund the respective number of Shares set forth opposite their names below:
Underwriters Number of Shares - --------------------------------------------------------------- ----------------- Donaldson, Lufkin & Jenrette Securities Corporation .......... 2,159,100 Advest, Inc. ................................................. 2,159,090 Fahnestock & Co. Inc. ........................................ 2,159,090 First Albany Corporation ..................................... 2,159,090 First of Michigan Corporation ................................ 2,159,090 Gruntal & Co., L.L.C. ........................................ 2,159,090 Interstate/Johnson Lane Corporation .......................... 2,159,090 Janney Montgomery Scott Inc. ................................. 2,159,090 Sands Brothers & Co., Ltd. ................................... 2,159,090 Sutro & Co. Incorporated ..................................... 2,159,090 Tucker Anthony Incorporated .................................. 2,159,090 Johnston, Lemon & Co. Incorporated ........................... 1,000,000 ABN AMRO Chicago Corporation ................................. 500,000 BT Alex.Brown Incorporated ................................... 500,000 CIBC Oppenheimer Corp. ....................................... 500,000 A.G. Edwards & Sons, Inc. .................................... 500,000 ING Baring Furman Selz LLC ................................... 500,000 Lazard Freres & Co. LLC ...................................... 500,000 PaineWebber Incorporated ..................................... 500,000 Schroder & Co. Inc. .......................................... 500,000 Adams, Harkness & Hill, Inc. ................................. 250,000 Arnhold and S. Bleichroeder, Inc. ............................ 250,000 Robert W. Baird & Co. Incorporated ........................... 250,000 Barington Capital Group, L.P. ................................ 250,000 George K. Baum & Company ..................................... 250,000 Black & Company, Inc. ........................................ 250,000 J.C. Bradford & Co. .......................................... 250,000 Burnham Securities Inc. ...................................... 250,000 Chatsworth Securities, LLC ................................... 250,000 Cleary, Gull, Reiland & McDevitt Inc. ........................ 250,000 Crowell, Weedon & Co. ........................................ 250,000 Dain Rauscher Wessels ........................................ 250,000 Dominick & Dominick, Incorporated ............................ 250,000 Suntrust Equitable Securities Corporation .................... 250,000 EVEREN Securities, Inc. ...................................... 250,000 Ferris, Baker Watts, Inc. .................................... 250,000 Fifth Third/The Ohio Company ................................. 250,000 Jefferies & Company .......................................... 250,000 Josephthal & Co. Inc. ........................................ 250,000 C.L. King & Associates, Inc. ................................. 250,000 Laidlaw Global Securities, Inc. .............................. 250,000 Legg Mason Wood Walker, Incorporated ......................... 250,000 Maxus Securities Corp. ....................................... 250,000 McClurg Capital Corporation .................................. 250,000 McDonald & Company Securities, Inc. .......................... 250,000 Morgan Keegan & Company, Inc. ................................ 250,000 Needham & Company, Inc. ...................................... 250,000 Noble Investment Co. of Palm Beach ........................... 250,000 Ormes Capital Markets, Inc. .................................. 250,000 44 Parker/Hunter Incorporated ................................... 250,000 Peacock, Hislop, Staley & Given .............................. 250,000 Pennsylvania Merchant Group .................................. 250,000 Piper Jaffray Inc. ........................................... 250,000 Ragen Mackenzie Incorporated ................................. 250,000 The Robinson-Humphrey Company, LLC ........................... 250,000 Roney Capital Markets ........................................ 250,000 Ryan, Beck & Co. ............................................. 250,000 Sanders Morris Mundy Inc. .................................... 250,000 Scott & Stringfellow, Inc. ................................... 250,000 Stephens Inc. ................................................ 250,000 Stifel, Nicolaus & Company, Incorporated ..................... 250,000 Stone & Youngberg ............................................ 250,000 TD Securities ................................................ 250,000 C.E. Unterberg, Towbin ....................................... 250,000 Van Kasper & Company ......................................... 250,000 ------- Total ..................................................... 40,000,000 ==========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the Shares hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all the Shares offered hereby (other than those Shares covered by the over-allotment option described below) if any are purchased. The Underwriters initially propose to offer the Shares in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus. There is no sales charge or underwriting discount charged to investors on purchases of Shares in the offering. DLJIM or an affiliate (not the Fund) will pay from its own assets a commission to the Underwriters in the amount of 5% of the price to the public per Share or $0.50 per Share. The Representatives have advised the Fund that the Underwriters may pay up to $0.30 per Share from such payment received from DLJIM or an affiliate to certain dealers who sell the Shares. The Fund has granted to the Underwriters an option, exercisable within 60 days after the date of the Underwriting Agreement, to purchase, from time to time, in whole or in part, up to an aggregate of 6,000,000 additional Shares at the initial public offering price. The Underwriters may exercise such option solely to cover overallotments, if any, made in connection with the offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Fund has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Fund has agreed not to offer or sell any additional common shares of beneficial interest of the Fund, other than as contemplated by this Prospectus, for a period of 180 days after the date of the Prospectus without the prior written consent of DLJ. Prior to the offering, there has been no established trading market for the Shares. The initial public offering price for the Shares offered hereby has been determined by negotiation among the Fund and the Representatives. There can be no assurance, however, that the price at which the Shares will sell in the public market after the offering will not be lower than the price at which they are sold by the Underwriters. The Shares have been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "DHY," subject to official notice of issuance. In order to meet the requirements for listing the Shares on the NYSE, the Underwriters have undertaken to sell lots of 100 or more Shares to a minimum of 2,000 beneficial owners. Other than in the United States, no action has been taken by the Fund or the Underwriters that would permit a public offering of the Shares offered hereby in any jurisdiction where action for that purpose is required. The Shares offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such Shares be distributed or published in 45 any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering of Shares and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Shares offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. In connection with the offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Shares. Specifically, the Underwriters may overallot the offering, creating a syndicate short position. The Underwriters may bid for and purchase Shares in the open market to cover such syndicate short position or to stabilize the price of the Shares. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed Shares in syndicate covering transactions, in stabilization transactions or otherwise. These activities may stabilize or maintain the market price of the Shares above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Fund anticipates that the Representative and certain other Underwriters may from time to time act as brokers or dealers in connection with the execution of its portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as such brokers while they are Underwriters. See "Management of the Fund." Employees of DLJ, DLJAM and DLJIM and their respective affiliates, and officers and trustees of the Fund and any other investment company advised by DLJAM or DLJIM, may purchase Shares in this offering at the price appearing on the cover page of this Prospectus; provided that the Shares must be held by the investor for up to 90 days and, provided further, that if the Shares trade in the secondary market at a premium over the public offering price when secondary trading commences, sales to these associated persons will be canceled. 46 DESCRIPTION OF SHARES The Fund is a newly organized unincorporated business trust under the laws of the State of Delaware organized on April 24, 1998. The Fund is authorized to issue an unlimited number of Shares. Each Share has one vote and, when issued and paid for in accordance with the terms of the offering, will be fully paid and non-assessable. Shares are of one class and have equal rights as to dividends and in liquidation. Shares have no preemptive, subscription or conversion rights and are freely transferable. The Fund will send annual and semi-annual financial statements to all its Shareholders. The Fund has no present intention of offering additional Shares, except as described herein and under the Automatic Dividend Reinvestment Plan, as it may be amended from time to time. See "Automatic Dividend Reinvestment Plan." Other offerings of Shares, if made, will require approval of the Board. The Board is authorized, however, to classify and reclassify any unissued shares into one or more additional or other classes or series as may be established from time to time by setting or changing in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares and pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any existing class or series. The Fund may reclassify and offer unissued shares as preferred stock subject to the limitations of the Investment Company Act. Any additional offering will not be made at a price per Share below the then current net asset value (exclusive of underwriting discounts and commissions) except in connection with an offering to existing Shareholders or with the consent of a majority of the Fund's outstanding Shares. Anti-Takeover Provisions in the Declaration of Trust The Fund's Declaration of Trust includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of its Board, and could have the effect of depriving Shareholders 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. These provisions may have the effect of discouraging attempts to acquire control of the Fund, which attempts could have the effect of increasing the expenses of the Fund and interfering with the normal operation of the Fund. The Board is divided into three classes, with the terms of one class expiring at each annual meeting of Shareholders. At each annual meeting, one class of Trustees is elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the Board. A Trustee may be removed from office for any reason or for no reason by a written instrument signed by at least two-thirds of the remaining Trustees or by a vote of the holders of at least two-thirds of the Shares. In addition, the Declaration of Trust requires the favorable vote of the holders of at least 80% of the outstanding Shares of each class of the Fund, voting as a class, then entitled to vote to approve, adopt or authorize certain transactions with 5%-or-greater holders of a class of Shares and their associates, unless the Board shall by resolution have approved a memorandum of understanding with such holders, in which case normal voting requirements would be in effect. For purposes of these provisions, a 5%-or-greater holder of a class of Shares (a "Principal Shareholder") refers to any person who, whether directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of any class of beneficial interest of the Fund. The transactions subject to these special approval requirements are: (i) the merger or consolidation of the Fund or any subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance of any securities of the Fund to any Principal Shareholder for cash (except pursuant to the Automatic Dividend Reinvestment Plan); (iii) the sale, lease or exchange of all or any substantial part of the assets of the Fund to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period); or (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in exchange for securities of the Fund, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period). The Board has determined that provisions with respect to the Board and the 80% voting requirements described above which voting requirements are greater than the minimum requirements under Delaware law or the Investment Company Act, are in the best interests of Shareholders generally. Reference should be made to the Declaration of Trust on file with the SEC for the full text of these provisions. 47 Repurchase of Shares Shares of closed-end management investment companies often trade at a discount to their net asset values, and the Shares may likewise trade at a discount to their net asset value, although it is possible that they may trade at a premium above net asset value. The market price of the Shares will be determined by such factors as relative demand for and supply of such Shares in the market, the Fund's net asset value, general market and economic conditions and other factors beyond the control of the Fund. See "Determination of Net Asset Value." Although the Shareholders will not have the right to redeem their Shares, the Fund may take action to repurchase Shares in the open market or make tender offers for Shares at their net asset value. This may have the effect of reducing any market discount from net asset value. There is no assurance that if action is undertaken to repurchase or tender for Shares, such action will result in the Shares' trading at a price which approximates their net asset value. Although Share repurchases and tenders could have a favorable effect on the market price of the Shares, it should be recognized that the acquisition of Shares by the Fund will decrease the total assets of the Fund and, therefore, have the effect of increasing the Fund's expense ratio. Any Share repurchases or tender offers will be made in accordance with requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act. 48 CONVERSION TO OPEN-END FUND The Fund may be converted to an open-end investment company at any time by an amendment to the Declaration of Trust. The Declaration of Trust provides that such an amendment would require the approval of two-thirds of each of the Fund's outstanding classes of shares (including any preferred shares) outstanding at that time entitled to vote on the matter (or a majority of such shares if the amendment previously was approved, adopted or authorized by at least two-thirds of the total number of Trustees). Such a vote also would satisfy a separate requirement in the Investment Company Act that the change be approved by the Shareholders. If approved in the foregoing manner, conversion of the Fund could not occur until at least 90 days after the Shareholders' meeting at which such conversion was approved and could take significantly longer and would also require at least 30 days' prior notice to all Shareholders. Conversion of the Fund to an open-end investment company would require the redemption of any outstanding preferred shares and any indebtedness not constituting bank loans, which could eliminate or alter the leveraged capital structure of the Fund with respect to the Shares. Thus, preferred shareholders, if any, would generally not have an incentive to consent to such conversion. Following any such conversion, it is also possible that certain of the Fund's investment policies and strategies would have to be modified to assure sufficient portfolio liquidity. Such requirement could also cause the Fund to dispose of portfolio securities or other assets at a time when it is not advantageous to do so, and could adversely affect the ability of the Fund to meet its investment objectives. In the event of conversion, the Shares would cease to be listed on the NYSE or other national securities exchange or market system. Shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the Investment Company Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. The Fund expects to pay all such redemption requests in cash, but intends to reserve the right to pay redemption requests in a combination of cash or securities. If a payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If the Fund were converted to an open-end fund, it is likely that new common shares would be sold at net asset value plus a sales load. OTHER INFORMATION Prior to the registration statement becoming effective, the Underwriters or other appropriate party may distribute advertising or other solicitation material which discusses (i) economic and market conditions and trends generally; (ii) historical and current conditions and trends in the lower grade securities market, and risk and reward potential in such market; (iii) comparative information, including statistical analysis and performance-related information, related to lower grade securities generally and investing in lower grade securities; (iv) the special considerations and potential benefits of investing in closed-end management investment companies; and (v) information about DLJIM and the Fund's portfolio manager, biographical information about the Fund's portfolio manager, including honors or awards received, and information and commentary on investment strategy or other matters of general interest to investors. LEGAL MATTERS Certain legal matters in connection with the Shares offered hereby will be passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom LLP and for the Underwriters by Davis Polk & Wardwell. EXPERTS The statement of assets, liabilities and capital of the Fund included in this Prospectus has been so included in reliance upon the report of Ernst & Young LLP, 787 Seventh Avenue, New York, New York, independent auditors, and on their authority as experts in auditing and accounting. 49 REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Shareholder of DLJ High Yield Bond Fund We have audited the accompanying statement of assets, liabilities and capital of DLJ High Yield Bond Fund as of July 6, 1998. This statement of assets, liabilities and capital is the responsibility of the Fund's management. Our resposibility is to express an opinion on this statement of assets, liabilities and capital based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of assets, liabilities and capital is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of assets, liabilities and capital. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement of assets, liabilities and capital presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the statement of assets, liabilities and capital referred to above presents fairly, in all material respects, the financial position of DLJ High Yield Bond Fund at July 6, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP New York, New York July 24, 1998 50 DLJ High Yield Bond Fund Statement of Assets, Liabilities and Capital July 6, 1998 ASSETS Cash .......................................................................... $ 100,000 Deferred organization and offering costs (Note 1) ............................. 985,000 --------- Total Assets ............................................................... 1,085,000 LIABILITIES Accrued organization and offering costs (Note 1) .............................. 985,000 --------- NET ASSETS ..................................................................... $ 100,000 ========= CAPITAL Common Shares, par value $ .001 per share; unlimited number of common shares of beneficial interest authorized; 10,000 shares issued and outstanding (Note 1) $ 10 Paid in Capital in excess of par .............................................. 99,990 --------- Total Capital--Equivalent of $10.00 net asset value per common share (Note 1) ........................................................ $ 100,000 =========
Notes to Statement of Assets, Liabilities and Capital Note 1. Organization The Fund was organized as an unincorporated business trust under the laws of the State of Delaware on April 24, 1998 and is a closed-end, non-diversified management investment company and has had no operations other than the sale to DLJ Investment Management Corp. (the "Investment Manager") of an aggregate of 10,000 shares for $100,000 on July 2, 1998. Offering costs of $925,000 will be charged to capital upon completion of the initial public offering. Organization costs of $60,000 will be capitalized and amortized to expense upon the commencement of operations. Note 2. Management and Administration Arrangements The Fund has engaged the Investment Manager to provide investment management services to the Fund. The Investment Manager will receive a monthly fee for advisory services at an annual rate equal to 1% of the average weekly value of the Fund's total assets minus the sum of accrued liabilities (other than the aggregate indebtedness constituting leverage). The Fund has engaged First Data Investor Services Group, Inc. (the "Administrator") to provide administration services to the Fund. The Administrator will receive a fee for such services at a rate of $50,000 per year. Note 3. Federal Income Taxes The Fund intends to qualify as a "regulated investment company" and as such (and by complying with the applicable provisions of the Internal Revenue Code of 1986, as amended) will not be subject to Federal income tax on taxable income (including realized capital gains) that is distributed to shareholders. 51 [This Page Intentionally Left Blank.] Appendix A RATINGS OF CORPORATE BONDS Description of Corporate Bond Ratings of Standard & Poor's Ratings Group: AAA--Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA--Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A--Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB--Bonds rated BB have less near-term vulnerability to default than other speculative grade debt. However, they face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. B--Bonds rated B have a greater vulnerability to default but presently have the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. CCC--Bonds rated CCC have a current identifiable vulnerability to default and are dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayment of principal. In the event of adverse business, financial or economic conditions, they are not likely to have the capacity to pay interest and repay principal. CC--The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C--The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. D--Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears. S&P's letter ratings may be modified by the addition of a plus (+) or a minus (-) sign designation, which is used to show relative standing within the major rating categories, except in the AAA (Prime Grade) category. Description of Bond Ratings of Moody's Investors Service, Inc. Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issuers. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what generally are 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 attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain A-1 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, therefore, not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issuers may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca present obligations which are speculative in a high degree. Such issuers are often in default or have other marked shortcomings. C--Bonds which are rated C are the lowest rated class of bonds, and issuers so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies the numerical modifiers 1, 2 and 3 to show relative standing within the major rating categories, except in the Aaa category and in the categories below B. The modifier 1 indicates a ranking for the security in the higher end of a rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of a rating category. A-2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Fund or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Shares by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making the offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to its date. ------------------------ TABLE OF CONTENTS
Page Prospectus Summary .................................... 1 Fee Table ............................................. 11 The Fund .............................................. 12 Use of Proceeds ....................................... 12 Investment Objectives and Policies .................... 13 Other Investment Practices ............................ 19 Risk Factors .......................................... 27 Investment Restrictions ............................... 30 Management of the Fund ................................ 31 Trustees and Officers of the Fund ..................... 33 Portfolio Transactions ................................ 34 Determination of Net Asset Value ...................... 36 Dividends and Other Distributions ..................... 37 Automatic Dividend Reinvestment Plan .................. 38 Taxes ................................................. 40 Underwriting .......................................... 44 Description of Shares ................................. 47 Conversion to Open-End Fund ........................... 49 Other Information ..................................... 49 Legal Matters ......................................... 49 Experts ............................................... 49 Report of Independent Auditors ........................ 50 Statement of Assets, Liabilities and Capital .......... 51 Appendix A ............................................ A-1
------------------------ Until August 22, 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the Shares, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. 40,000,000 Shares DLJ HIGH YIELD BOND FUND Common Shares ------------------------------- P R O S P E C T U S ------------------------------- Donaldson, Lufkin & Jenrette Advest, Inc. FAC/Equities Fahnestock & Co. Inc. First of Michigan Corporation Gruntal & Co., L.L.C. Interstate/Johnson Lane Corporation Janney Montgomery Scott Inc. Sands Brothers & Co., Ltd. Sutro & Co. Incorporated Tucker Anthony Incorporated Johnston, Lemon & Co. Incorporated July 28, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (1) Financial Statements: The Selected Financial Information, Statement of Operations, Statement of Changes in Net Assets, and any Schedules thereto are omitted because the required information is included in the financial statement included in Part A or Part B, or because the conditions requiring their filing do not exist. (2) Exhibits (a) Agreement and Declaration of Trust (b) Bylaws* (c) Not Applicable (d) Form of Specimen Certificate Representing Shares of Beneficial Interest** (e) Form of Terms and Conditions of Automatic Dividend Reinvestment Plan* (f) Not Applicable (g) Form of Investment Management Agreement* (h) (1) Form of Master Agreement Among Underwriters (2) Form of Underwriting Agreement* (3) Form of Master Selected Dealers Agreement* (i) Not Applicable (j) Form of Global Custodial Services Agreement* (k) (1) Form ofTransfer Agency and Services Agreement* (2) Form of Services Agreement* (l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP (m) Not Applicable (n) Consent of Independent Auditors* (o) Not Applicable (p) Initial Capital Agreement* (q) Not Applicable (r) Financial Data Schedule* Form of Power of Attorney*
- ---------- *previously filed **not filed ITEM 25. MARKETING ARRANGEMENTS See Exhibit h in Item 24(2) of this Registration Statement. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission Fees..................................... $135,700 National Association of Securities Dealers, Inc. Fees....................... 30,500 New York Stock Exchange Listing Fee......................................... 228,100 Printing and Engraving Expenses*............................................ 100,000 Accounting Fees and Expenses*............................................... 3,500 Legal Fees*................................................................. 280,000 Custodian and Transfer and Dividend Disbursing Agent's Fees*................ 10,000 Miscellaneous*.............................................................. 111,400 ------- Total $899,200 ========
* Estimates ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Not Applicable. ITEM 28. NUMBER OF RECORD HOLDERS OF SECURITIES As of July 29, 1998, there are the following number of Record Holders:
- -------------------------------------------------------------------------------- Title of Class Number of Record Holders -------------- ------------------------ - -------------------------------------------------------------------------------- Common Shares of Beneficial Interest 1 - --------------------------------------------------------------------------------
ITEM 29. INDEMNIFICATION Pursuant to the Agreement and Declaration of Trust of the Registrant, the Registrant has agreed to indemnify its trustees and officers against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting his capacity as officer or trustee of the Registrant by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was in the best interest of the Registrant or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified thereunder against any liability to any person or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of his position. Pursuant to the Investment Management Agreement, the Registrant has agreed to indemnify its investment manager and each of its investment manager's directors, officers, employees, agents, associates and controlling persons and the partners, directors, officers, employees, members and agents thereof (including any individual who serves at the investment manager's request as director, officer, partner, trustee or the like of another entity) to the same extent as its trustees and officers. Pursuant to the Underwriting Agreement, the Registrant has agreed to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter from and against any and all losses, claims, damages, liabilities and judgements caused by any untrue statement or alleged untrue statement of a material fact contained in this Registration Statement or caused by any omission or alleged omission to state herein a material fact required to be stated herein or necessary to make the statements herein not misleading. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant, the investment manager or any underwriter pursuant to the foregoing provisions, or otherwise, the Registrant, the investment manager and each underwriter have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer, or controlling person of the Registrant, the investment manager or any underwriter in connection with the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person of the Registrant, the investment manager or any underwriter in connection with the Shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER For information as to the business, profession, vocation or employment of a substantial nature of each of the officers and directors of the Advisor, reference is made to the Manager's current Form ADV (File No. 801-51377) filed under the Investment Advisers Act of 1940, incorporated herein by reference. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS All accounts, books and other documents required by Section 31(a) of the Investment Company Act of 1940 and the rules thereunder to be maintained (i) by the Registrant will be maintained at its offices, located at 277 Park Avenue, New York, New York, 10172; (ii) by the Manager will be maintained at its offices, located at 277 Park Avenue, New York, New York 10172; and (iii) all such accounts, books and other documents required to be maintained by the principal underwriter will be maintained by Donaldson, Lufkin & Jenrette Securities Corporation. ITEM 32. MANAGEMENT SERVICES Not Applicable ITEM 33. UNDERTAKINGS (1) The Registrant undertakes to suspend offering of its Shares until it amends its prospectus if (1) subsequent to the effective date of its Registration Statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the Registration Statement, or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus. (2) Not Applicable (3) Not Applicable (4) Not Applicable (5) If applicable: (a) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) For the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating or to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (6) Not Applicable SIGNATURES Pursuant to the requirements of Rule 486 promulgated under the Securities Act of 1933, the Registrant has duly caused this Post-Effective Amendment No. 1 to the Registration Statement on Form N-2 of DLJ High Yield Bond Fund (Securities Act File No. 333- 52373) to be signed on behalf of the undersigned, thereto duly authorized, in the City of New York, and the State of New York on the 30th day of July, 1998. The Registrant represents that this Post-Effective Amendment No. 1 is filed solely for purposes described in paragraph (b)(1) of Rule 486 and that no material event requiring disclosure in the prospectus has occurred since the effective date of the Registration Statement. DLJ HIGH YIELD BOND FUND By:/s/ G. MOFFETT COCHRAN ------------------------- Name: G. Moffett Cochran Title: Trustee and President Pursuant to the requirements of Rule 486 promulgated under the Securities Act of 1933, this Post-Effective Amendment No. 1 to the Registration Statement on Form N-2 of DLJ High Yield Bond Fund (Securities Act File No. 333-52373) has been signed by the following persons in the capacities indicated on the 30th day of July, 1998.
Signature Name Title --------- ---- ----- /s/ G. MOFFETT COCHRAN G. Moffett Cochran Trustee and President - ---------------------------- /s/ MARTIN JAFFE* Martin Jaffe Trustee, Vice President, Treasurer and Secretary - ---------------------------- MARTIN JAFFE /s/ ROBERT E. FISCHER* Robert E. Fischer Trustee - ---------------------------- ROBERT E. FISCHER /s/ JOHN W. WALLER, III* John W. Waller, III Trustee - ---------------------------- JOHN W. WALLER, III /s/ WILMOT H. KIDD, III* Wilmot H. Kidd, III Trustee - ---------------------------- WILMOT H. KIDD, III
*Signed by G. Moffett Cochran pursuant to a power of attorney, the form of which has been previously filed. EX-99.2(A) 2 AGREEMENT AND DECLARATION OF TRUST DLJ HIGH YIELD BOND FUND -------------------------------------------- AGREEMENT AND DECLARATION OF TRUST -------------------------------------------- April 24, 1998 TABLE OF CONTENTS ARTICLE I The Trust 1.1 Name......................................................................2 1.2 Definitions...............................................................2 ARTICLE II Trustees 2.1 Number and Qualification..................................................4 2.2 Term and Election.........................................................4 2.3 Resignation and Removal...................................................5 2.4 Vacancies.................................................................6 2.5 Meetings..................................................................6 2.6 Officers..................................................................7 ARTICLE III Powers and Duties of Trustees 3.1 General...................................................................7 3.2 Investments...............................................................8 3.3 Legal Title...............................................................8 3.4 Issuance and Repurchase of Shares.........................................9 3.5 Borrow Money or Utilize Leverage..........................................9 3.6 Delegation; Committees....................................................9 3.7 Collection and Payment...................................................10 3.8 Expenses.................................................................10 3.9 By-Laws..................................................................11 3.10 Miscellaneous Powers....................................................11 3.11 Further Powers..........................................................11 3.12 Trustee Action by Written Consent.......................................12 ARTICLE IV Advisory, Management and Distribution Arrangements 4.1 Advisory and Management Arrangements.....................................12 4.2 Distribution Arrangements................................................13 4.3 Parties to Contract......................................................13 i ARTICLE V Limitations of Liability and Indemnification 5.1 No Personal Liability of Shareholders, Trustees, etc.......................................................14 5.2 Mandatory Indemnification................................................14 5.3 No Bond Required of Trustees.............................................16 5.4 No Duty of Investigation; Notice in Trust Instruments, etc....................................................16 5.5 Reliance on Experts, etc.................................................17 5.6 Indemnification of Shareholders..........................................18 ARTICLE VI Shares of Beneficial Interest 6.1 Beneficial Interest......................................................18 6.2 Other Securities.........................................................18 6.3 Rights of Shareholders...................................................19 6.4 Trust Only...............................................................19 6.5 Issuance of Shares.......................................................19 6.6 Register of Shares.......................................................20 6.7 Transfer Agent and Registrar.............................................20 6.8 Transfer of Shares.......................................................20 6.9 Notices..................................................................21 ARTICLE VII Custodians 7.1 Appointment and Duties...................................................21 7.2 Central Certificate System...............................................22 ARTICLE VIII Redemption 8.1 Redemptions..............................................................23 8.2 Disclosure of Holding....................................................23 8.3 [Reserved]...............................................................23 ARTICLE IX Determination of Net Asset Value Net Income and Distributions 9.1 Net Asset Value..........................................................23 9.2 Distributions to Shareholders............................................23 9.3 Power to Modify Foregoing Procedures.....................................24 ii ARTICLE X Shareholders 10.1 Meetings of Shareholders................................................25 10.2 Voting..................................................................25 10.3 Notice of Meeting and Record Date.......................................26 10.4 Quorum and Required Vote................................................26 10.5 Proxies, etc............................................................27 10.6 Reports.................................................................28 10.7 Inspection of Records...................................................28 10.8 Shareholder Action by Written Consent...................................28 ARTICLE XI Duration: Termination of Trust; Amendment; Mergers, Etc. 11.1 Duration................................................................29 11.2 Termination.............................................................29 11.3 Amendment Procedure.....................................................30 11.4 Merger, Consolidation and Sale of Assets................................31 11.5 Incorporation...........................................................31 11.6 Conversion..............................................................32 11.7 Certain Transactions....................................................33 ARTICLE XII Miscellaneous 12.1 Filing..................................................................35 12.2 Resident Agent..........................................................35 12.3 Governing Law...........................................................35 12.4 Counterparts............................................................36 12.5 Reliance by Third Parties...............................................36 12.6 Provisions in Conflict with Law or Regulation.........................................................36 iii DLJ HIGH YIELD BOND FUND AGREEMENT AND DECLARATION OF TRUST AGREEMENT AND DECLARATION OF TRUST made as of the 24th day of April, 1998, by the Trustees hereunder, and by the holders of shares of beneficial interest issued hereunder as hereinafter provided. WHEREAS, this Trust has been formed to carry on business as set forth more particularly hereinafter; WHEREAS, this Trust is authorized to issue an unlimited number of its shares of beneficial interest all in accordance with the provisions hereinafter set forth; WHEREAS, the Trustees have agreed to manage all property coming into their hands as Trustees of a Dela ware business trust in accordance with the provisions hereinafter set forth; and WHEREAS, the parties hereto intend that the Trust created by this Declaration and the Certificate of Trust filed with the Secretary of State of the State of Delaware on April 24, 1998 shall constitute a business trust under the Delaware Business Trust Statute and that this Declaration shall constitute the governing instrument of such business trust. NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities, and other assets which they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the benefit of the holders from time to time of shares of beneficial interest in this Trust as hereinafter set forth. ARTICLE I The Trust 1.1 Name. This Trust shall be known as the "DLJ High Yield Bond Fund" and the Trustees shall conduct the business of the Trust under that name or any other name or names as they may from time to time determine. 1.2 Definitions. As used in this Declaration, the following terms shall have the following meanings: The terms "Affiliated Person", "Assignment", "Commission", "Interested Person" and "Principal Underwriter" shall have the meanings given them in the 1940 Act. "By-Laws" shall mean the By-Laws of the Trust as amended from time to time by the Trustees. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. "Commission" shall mean the Securities and Exchange Commission. "Declaration" shall mean this Agreement and Declaration of Trust, as amended or amended and restated from time to time. "Delaware Business Trust Statute" shall mean the provisions of the Delaware Business Trust Act, 12 Del. C. ss.3801, et. seq., as such Act may be amended from time to time. "Fundamental Policies" shall mean the investment policies and restrictions as set forth from time to time in any Prospectus or contained in any current Registration Statement of the Trust filed with the Securities and Exchange Commission or as otherwise adopted by the Trustees and the Shareholders in accordance with the requirements of the 1940 Act and designated as fundamental policies therein as they may be amended in accordance with the requirements of the 1940 Act. 2 "Majority Shareholder Vote" shall mean a vote of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of the Trust. "Person" shall mean and include individuals, corporations, partnerships, trusts, limited liability companies, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Prospectus" shall mean the currently effective Prospectus of the Trust, if any, under the Securities Act of 1933, as amended. "Shareholders" shall mean as of any particular time the holders of record of outstanding Shares of the Trust, at such time. "Shares" shall mean the transferable units of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares. In addition, Shares also means any preferred shares or preferred units of beneficial interest which may be issued from time to time, as described herein. All references to Shares shall be deemed to be Shares of any or all Series or classes as the context may require. "Trust" shall mean the trust established by this Declaration, as amended from time to time, inclusive of each such amendment. "Trustees" shall mean the signatory to this Declaration, so long as he shall continue in office in accordance with the terms hereof, and all other persons who at the time in question have been duly elected or appointed and have qualified as trustees in accordance with the provisions hereof and are then in office. "Trust Property" shall mean as of any particular time any and all property, real or personal, tangible or intangible, which at such time is owned or held by or for the account of the Trust or the Trustees in such capacity. The "1940 Act" refers to the Investment Company Act of 1940 and the rules and regulations promulgated 3 thereunder and exemptions granted therefrom, as amended from time to time. ARTICLE II Trustees 2.1 Number and Qualification. Prior to a public offering of Shares, there may be a sole Trustee and thereafter, the number of Trustees shall be no less than three or more than fifteen, provided, however, that the number of Trustees may be increased or decreased by a written instrument signed by a majority of the Trustees then in office. No reduction in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his term. An individual nominated as a Trustee shall be at least 21 years of age and not older than 70 years of age at the time of nomination and not under legal disability. Trustees need not own Shares and may succeed themselves in office. 2.2 Term and Election. The Board of Trustees shall be divided into three classes. Within the limits above specified, the number of the Trustees in each class shall be determined by resolution of the Board of Trustees. The term of office of all of the Trustees shall expire on the date of the first annual or special meeting of Shareholders following the effective date of the Registration Statement relating to the Shares under the Securities Act of 1933, as amended. The term of office of the first class shall expire on the date of the second annual meeting of Shareholders or special meeting in lieu thereof. The term of office of the second class shall expire on the date of the third annual meeting of Shareholders or special meeting in lieu thereof. The term of office of the third class shall expire on the date of the fourth annual meeting of Shareholders or special meeting in lieu thereof. Upon expiration of the term of office of each class as set forth above, the number of Trustees in such class, as determined by the Board of Trustees, shall be elected for a term expiring on the date of the third annual meeting of Shareholders or special meeting in lieu thereof following such expiration to succeed the Trustees whose terms of office expire. The Trustees shall be elected at an annual meeting of the Shareholders or special meeting in lieu thereof called for that pur- 4 pose, except as provided in Section 2.3 of this Article and each Trustee elected shall hold office until his or her successor shall have been elected and shall have qualified; except (a) that any Trustee may resign his or her trust (without need for prior or subsequent accounting) by an instrument in writing signed by him or her and delivered to the other Trustees, which shall take effect upon such delivery or upon such later date as is specified therein; (b) that any Trustee may be removed (provided the aggregate number of Trustees after such removal shall not be less than the number required by Section 2.1 hereof) for cause, at any time by written instrument, signed by the remaining Trustees, specifying the date when such removal shall become effective; and (c) that any Trustee who requests in writing to be retired or who has become incapacitated by illness or injury may be retired by written instrument signed by a majority of the other Trustees, and he or she shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust property held in the name of the resigning or removed Trustee. Upon the incapacity or death of any Trustee, his or her legal representative shall execute and deliver on his or her behalf such document as the remaining Trustees shall require as provided in the preceding sentence. 2.3 Resignation and Removal. Any Trustee may resign his trust (without need for prior or subsequent accounting) by an instrument in writing signed by him and delivered or mailed to the Chairman, if any, the President or the Secretary and such resignation shall be effective upon such delivery, or at a later date according to the terms of the instrument. Any of the Trustees may be removed (provided the aggregate number of Trustees after such removal shall not be less than the minimum number required by Section 2.1 hereof) by the action of two-thirds of the remaining Trustees or the holders of two thirds of the Shares. Upon the resignation or removal of a Trustee, or such persons otherwise ceasing to be a Trustee, such persons shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in the name of the resigning or removed Trustee. Upon the incapacity or death of any Trustee, such Trustee's legal representative shall execute and deliver on such Trustee's behalf such documents 5 as the remaining Trustees shall require as provided in the preceding sentence. 2.4 Vacancies. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of the death, resignation, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office, or removal, of a Trustee. Whenever a vacancy in the Board of Trustees shall occur, the remaining Trustees may fill such vacancy by appointing an individual having the qualifications described in this Article by a written instrument signed by a majority of the Trustees then in office or by election by the Shareholders, or may leave such vacancy unfilled or may reduce the number of Trustees (provided the aggregate number of Trustees after such reduction shall not be less than the minimum number required by Section 2.1 hereof). Any vacancy created by an increase in Trustees may be filled by the appointment of an individual having the qualifications described in this Article made by a written instrument signed by a majority of the Trustees then in office or by election by the Shareholders. No vacancy shall operate to annul this Declaration or to revoke any existing agency created pursuant to the terms of this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided herein, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. 2.5 Meetings. Meetings of the Trustees shall be held from time to time upon the call of the Chairman, if any, the President, the Secretary or any two Trustees. Regular meetings of the Trustees may be held without call or notice at a time and place fixed by the By-Laws or by resolution of the Trustees. Notice of any other meeting shall be mailed not less than 48 hours before the meeting or otherwise actually delivered orally or in writing not less than 24 hours before the meeting, but may be waived in writing by any Trustee either before or after such meeting. The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened. The Trustees may act with or without a 6 meeting. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Unless provided otherwise in this Declaration of Trust, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present (a quorum being present) or without a meeting by written consent of a majority of the Trustees. Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting. A quorum for all meetings of any such committee shall be a majority of the members thereof. Unless provided otherwise in this Declaration, any action of any such committee may be taken at a meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of a majority of the members. With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons in any action to be taken may be counted for quorum purposes under this Section and shall be entitled to vote to the extent not prohibited by the 1940 Act. All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other; participation in a meeting pursuant to any such communications system shall constitute presence in person at such meeting. 2.6 Officers. The Trustees shall elect a President, a Secretary and a Treasurer and may elect a Chairman who shall serve at the pleasure of the Trustees or until their successors are elected. The Trustees may elect or appoint or may authorize the Chairman, if any, or President to appoint such other officers or agents with such powers as the Trustees may deem to be advisable. A Chairman shall, and the President, Secretary and Treasurer may, but need not, be a Trustee. 7 ARTICLE III Powers and Duties of Trustees 3.1 General. The Trustees shall owe to the Trust and its Shareholders the same fiduciary duties as owed by directors of corporations to such corporations and their stockholders under the general corporation law of the State of Delaware. The Trustees shall have exclusive and absolute control over the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by this Declaration. The Trustees may perform such acts as in their sole discretion are proper for conducting the business of the Trust. The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustees may be exercised without order of or resort to any court. 3.2 Investments. The Trustees shall have power, subject to the Fundamental Policies in effect from time to time with respect to the Trust to: (a) manage, conduct, operate and carry on the business of an investment company; (b) subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise deal in or dispose of any and all sorts of property, tangible or intangible, including but not limited to securities of any type whatsoever, whether equity or non-equity, of any issuer, evidences of indebtedness of any person and any other rights, interests, instruments or property of any sort and to exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more Persons to exercise any of said rights, powers and privileges in respect of any of said investments. The Trustees shall not be limited by any law limiting the investments which may be made by fiduciaries. 3.3 Legal Title. Legal title to all the Trust Property shall be vested in the Trustees as joint tenants except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name 8 of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, custodian or pledgee, on such terms as the Trustees may determine, provided that the interest of the Trust therein is appropriately protected. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each person who may hereafter become a Trustee upon his due election and qualification. Upon the ceasing of any person to be a Trustee for any reason, such person shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. 3.4 Issuance and Repurchase of Shares. The Trustees shall have the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in, Shares, including Shares in fractional denominations, and, subject to the more detailed provisions set forth in Articles VIII and IX, to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or property whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the laws of the State of Delaware governing business corporations. 3.5 Borrow Money or Utilize Leverage. Subject to the Fundamental Policies in effect from time to time with respect to the Trust, the Trustees shall have the power to borrow money or otherwise obtain credit or utilize leverage to the maximum extent permitted by law or regulation as such may be needed from time to time and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Trust, including the lending of portfolio securities, and to endorse, guarantee, or undertake the performance of any obligation, contract or engagement of any other person, firm, association or corporation. 3.6 Delegation; Committees. The Trustees shall have the power, consistent with their continuing exclusive authority over the management of the Trust and 9 the Trust Property, to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to at least the same extent as such delegation is permitted to directors of a Delaware business corporation and is permitted by the 1940 Act, as well as any further delegations the Trustees may determine to be desirable, expedient or necessary in order to effect the purpose hereof. The Trustees may designate an executive committee which shall have all authority of the entire Board of Trustees except such committee cannot declare dividends and cannot authorize removal of a trustee or any merger, consolidation or sale of substantially all of the assets of the Trust. 3.7 Collection and Payment. The Trustees shall have power to collect all property due to the Trust; to pay all claims, including taxes, against the Trust Property or the Trust, the Trustees or any officer, employee or agent of the Trust; to prosecute, defend, compromise or abandon any claims relating to the Trust Property or the Trust, or the Trustees or any officer, employee or agent of the Trust; to foreclose any security interest securing any obligations, by virtue of which any property is owed to the Trust; and to enter into releases, agreements and other instruments. Except to the extent required for a Delaware business corporation, the Shareholders shall have no power to vote as to whether or not a court action, legal proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders. 3.8 Expenses. The Trustees shall have power to incur and pay out of the assets or income of the Trust any expenses which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of this Declaration, and the business of the Trust, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees. The Trustees may pay themselves such compensation for special services, including legal, underwriting, syndicating and brokerage services, as they in good faith may deem reasonable and reimbursement for expenses 10 reasonably incurred by themselves on behalf of the Trust. The Trustees shall have the power, as frequently as they may determine, to cause each Shareholder to pay directly, in advance or arrears, for charges of distribution, of the custodian or transfer, Shareholder servicing or similar agent, a pro rata amount as defined from time to time by the Trustees, by setting off such charges due from such Shareholder from declared but unpaid dividends or distributions owed such Shareholder and/or by reducing the number of shares in the account of such Shareholder by that number of full and/or fractional Shares which represents the outstanding amount of such charges due from such Shareholder. 3.9 By-Laws. The Trustees may adopt and from time to time amend or repeal the By-Laws for the conduct of the business of the Trust. 3.10 Miscellaneous Powers. The Trustees shall have the power to: (a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust; (b) enter into joint ventures, partnerships and any other combinations or associations; (c) purchase, and pay for out of Trust Property, insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisors, distributors, selected dealers or independent contractors of the Trust against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust would have the power to indemnify such Person against such liability; (d) establish pension, profit-sharing, share purchase, and other retirement, incentive and benefit plans for any Trustees, officers, employees and agents of the Trust; (e) make donations, irrespective of benefit to the Trust, for charitable, religious, educational, scientific, civic or similar purposes; (f) to the extent permitted by law, indemnify any Person with whom the Trust has dealings, including without limitation any advisor, administrator, manager, transfer agent, custodian, distributor or selected dealer, or any other person as the Trustees may see fit to such extent as the Trustees shall determine; (g) guarantee indebtedness or contractual obligations of others; (h) determine and change the fiscal year of the Trust and the method in which its accounts shall be kept; 11 and (i) adopt a seal for the Trust but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust. 3.11 Further Powers. The Trustees shall have the power to conduct the business of the Trust and carry on its operations in any and all of its branches and maintain offices both within and without the State of Delaware, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. The Trustees will not be required to obtain any court order to deal with the Trust Property. 3.12 Trustee Action by Written Consent. Any action which may be taken by Trustees by vote may be taken without a meeting if the number of Trustees required for approval of such action at a meeting of Trustees consent to the action in writing and the written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Trustees. ARTICLE IV Advisory, Management and Distribution Arrangements 4.1 Advisory and Management Arrangements. Subject to the requirements of applicable law as in effect from time to time, the Trustees may in their discretion from time to time enter into advisory, administration or management contracts whereby the other party to such contract shall undertake to furnish the Trustees such advisory, administrative and management services, with respect to the Trust as the Trustees shall from time to time consider desirable and all upon such terms and conditions as the Trustees may in their 12 discretion determine. Notwithstanding any provisions of this Declaration, the Trustees may authorize any advisor, administrator or manager (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect investment transactions with respect to the assets on behalf of the Trustees to the full extent of the power of the Trustees to effect such transactions or may authorize any officer, employee or Trustee to effect such transactions pursuant to recommendations of any such advisor, administrator or manager (and all without further action by the Trustees). Any such investment transaction shall be deemed to have been authorized by all of the Trustees. 4.2 Distribution Arrangements. Subject to compliance with the 1940 Act, the Trustees may retain underwriters and/or placement agents to sell Trust Shares. The Trustees may in their discretion from time to time enter into one or more contracts, providing for the sale of the Shares of the Trust, whereby the Trust may either agree to sell such Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article IV or the By-Laws; and such contract may also provide for the repurchase or sale of Shares of the Trust by such other party as principal or as agent of the Trust and may provide that such other party may enter into selected dealer agreements with registered securities dealers and brokers and servicing and similar agreements with persons who are not registered securities dealers to further the purposes of the distribution or repurchase of the Shares of the Trust. 4.3 Parties to Contract. Any contract of the character described in Section 4.1 and 4.2 of this Article IV or in Article VII hereof may be entered into with any Person, although one or more of the Trustees, officers or employees of the Trust may be an officer, director, trustee, shareholder, or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any Person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust 13 under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was reasonable and fair and not inconsistent with the provisions of this Article IV or the By-Laws. The same Person may be the other party to contracts entered into pursuant to Sections 4.1 and 4.2 above or Article VII, and any individual may be financially interested or otherwise affiliated with Persons who are parties to any or all of the contracts mentioned in this Section 4.3. ARTICLE V Limitations of Liability and Indemnification 5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. Shareholders shall have the same limitation of personal liability as is extended to stockholders of a private corporation for profit incorporated under the general corporation law of the State of Delaware. No Trustee or officer of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person, other than the Trust or its Shareholders, in connection with Trust Property or the affairs of the Trust, save only liability to the Trust or its Shareholders arising from bad faith, willful misfeasance, gross negligence (negligence in the case of those Trustees or officers who are directors, officers or employees of the Trust's investment advisor ("Affiliated Indemnitees")) or reckless disregard for his duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee or officer, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, subject to the foregoing exception, he shall not, on account thereof, be held to any personal liability. 14 5.2 Mandatory Indemnificatioa. The Trust hereby agrees to indemnify the Trustees and officers of the Trust (each such person being an "indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth above in this Section 5.2 by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was in the best interest of the Trust or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified hereunder against any liability to any person or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence (negligence in the case of Affiliated Indemnitees), or (iv) reckless disregard of the duties involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as "disabling conduct"). Notwithstanding the foregoing, with respect to any action, suit or other proceeding voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee was authorized by a majority of the Trustees. b. Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has been a determination (1) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is entitled to indemnification hereunder or, (2) in the absence of such a decision, by (i) a majority vote of a quorum of those Trustees who are neither "interested persons" of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding ("Disinterested Non-Party 15 Trustees"), that the indemnitee is entitled to indemnification hereunder, or (ii) if such quorum is not obtainable or even if obtainable, if such majority so directs, independent legal counsel in a written opinion conclude that the indemnitee should be entitled to indemnification hereunder. All determinations to make advance payments in connection with the expense of defending any proceeding shall be authorized and made in accordance with the immediately succeeding paragraph (c) below. c. The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation by the indemnitee of the indemnitee's good faith belief that the standards of conduct necessary for indemnification have been met and a written undertaking to reimburse the Trust unless it is subsequently determined that he is entitled to such indemnification and if a majority of the Trustees determine that the applicable standards of conduct necessary for indemnification appear to have been met. In addition, at least one of the following conditions must be met: (1) the indemnitee shall provide adequate security for his undertaking, (2) the Trust shall be insured against losses arising by reason of any lawful advances, or (3) a majority of a quorum of the Disinterested Non-Party Trustees, or if a majority vote of such quorum so direct, independent legal counsel in a written opinion, shall conclude, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is substantial reason to believe that the indemnitee ultimately will be found entitled to indemnification. d. The rights accruing to any indemnitee under these provisions shall not exclude any other right to which he may be lawfully entitled. e. Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall have the power and authority to indemnify other Persons providing services to the Trust to the full extent provided by law as if the Trust were a corporation organized under the Delaware General Corporation Law provided that such indemnification has been approved by a majority of the Trustees. 16 5.3 No Bond Required of Trustees. No Trustee shall, as such, be obligated to give any bond or other security for the performance of any of his duties hereunder. 5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No purchaser, lender, transfer agent or other person dealing with the Trustees or with any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, undertaking, instrument, certificate, Share, other security of the Trust, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust. Every written obligation, contract, undertaking, instrument, certificate, Share, other security of the Trust made or issued by the Trustees or by any officers, employees or agents of the Trust in their capacity as such, shall contain an appropriate recital to the effect that the Shareholders, Trustees, officers, employees or agents of the Trust shall not personally be bound by or liable thereunder, nor shall resort be had to their private property for the satisfaction of any obligation or claim thereunder, and appropriate references shall be made therein to this Declaration, and may contain any further recital which they may deem appropriate, but the omission of such recital shall not operate to impose personal liability on any of the Trustees, Shareholders, officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust Property, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable or is required by the 1940 Act. 5.5 Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of its duties, be fully and completely 17 justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of the Trust's officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee. 5.6 Indemnification of Shareholders. If any Shareholder or former Shareholder shall be held personally liable solely by reason of its being or having been a Shareholder and not because of its acts or omissions or for some other reason, the Shareholder or former Shareholder (or its heirs, executors, administrators or other legal representatives or in the case of any entity, its general successor) shall be entitled out of the assets belonging to the Trust to be held harmless from and indemnified to the maximum extent permitted by law against all loss and expense arising from such liability. The Trust shall, upon request by such Shareholder, assume the defense of any claim made against such Shareholder for any act or obligation of the Trust and satisfy any judgment thereon from the assets of the Trust. ARTICLE VI Shares of Beneficial Interest 6.1 Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into an unlimited number of transferable shares of beneficial interest, par value $.001 per share. All Shares issued in accordance with the terms hereof, including, without limitation, Shares issued in connection with a dividend in Shares or a split of Shares, shall be fully paid and, except as provided in the last sentence of Section 3.8, nonassessable when the consideration determined by the Trustees (if any) therefor shall have been received by the Trust. 6.2 Other Securities. The Trustees may authorize and issue such other securities as they determine to be necessary, desirable or appropriate 18 including preferred interests, debt securities or other senior securities subject to the Fundamental Policies and the requirements of the 1940 Act. To the extent that the Trustees authorize and issue preferred shares they are hereby authorized and empowered to amend or supplement this Declaration as is necessary or appropriate to comply with the requirements of the 1940 Act relating to such securities or as required to issue such securities by rating agencies or other persons, all without the approval of Shareholders. Any such supplement or amendment shall be filed as is necessary. The Trustees are also authorized to take such actions and retain such persons as they see fit to offer and sell such securities. 6.3 Rights of Shareholders. The Shares shall be personal property giving only the rights in this Declaration specifically set forth. The ownership of the Trust Property of every description and the right to conduct any business herein before described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume any losses of the Trust or, subject to the right of the Trustees to charge certain expenses directly to Shareholders, as provided in the last sentence of Section 3.8, suffer an assessment of any kind by virtue of their ownership of Shares. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights (except as specified in this Section 6.3, in Section 11.4 or as specified by the Trustees when creating the Shares, as in preferred shares). 6.4 Trust Only. It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust. Nothing in this Declaration shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. 19 6.5 Issuance of Shares. The Trustees, in their discretion, may from time to time without vote of the Shareholders issue Shares including preferred shares that may have been established pursuant to Section 6.2, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount and type of consideration, including cash or property, at such time or times, and on such terms as the Trustees may determine, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with the assumption of, liabilities) and businesses. The Trustees may from time to time divide or combine the Shares into a greater or lesser number without thereby changing the proportionate beneficial interest in such Shares. Issuances and redemptions of Shares may be made in whole Shares and/or l/l,000ths of a Share or multiples thereof as the Trustees may determine in such fractions thereof. 6.6 Register of Shares. A register shall be kept at the Trust or any transfer agent duly appointed by the Trustees under the direction of the Trustees which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Separate registers shall be established and maintained for each class. Each such register shall be conclusive as to who are the holders of the Shares of the applicable class and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein provided, until he has given his address to a transfer agent or such other officer or agent of the Trustees as shall keep the register for entry thereon. It is not contemplated that certificates will be issued for the Shares; however, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate fees therefore and rules and regulations as to their use. 6.7 Transfer Agent and Registrar. The Trustees shall have power to employ a transfer agent or transfer agents, and a registrar or registrars, with respect to the Shares. The transfer agent or transfer agents may keep the applicable register and record 20 therein, the original issues and transfers, if any, of the said Shares. Any such transfer agent and registrars shall perform the duties usually performed by transfer agents and registrars of certificates of stock in a corporation, as modified by the Trustees. 6.8 Transfer of Shares. Shares shall be transferable on the records of the Trust only by the record holder thereof or by its agent thereto duly authorized in writing, upon delivery to the Trustees or a transfer agent of the Trust of a duly executed instrument of transfer, together with such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required. Upon such delivery the transfer shall be recorded on the applicable register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer. Any person becoming entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the applicable register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or a transfer agent of the Trust, but until such record is made, the Shareholder of record shall be deemed to be the holder of such for all purposes hereof, and neither the Trustees nor any transfer agent or registrar nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law. 6.9 Notices. Any and all notices to which any Shareholder hereunder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record at his last known address as recorded on the applicable register of the Trust. 21 ARTICLE VII Custodians 7.1 Appointment and Duties. The Trustees shall at all times employ a custodian or custodians, meeting the qualifications for custodians for portfolio securities of investment companies contained in the 1940 Act, as custodian with respect to the assets of the Trust. Any custodian shall have authority as agent of the Trust with respect to which it is acting as determined by the custodian agreement or agreements, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the By-Laws of the Trust and the 1940 Act: (1) to hold the securities owned by the Trust and deliver the same upon written order; (2) to receive any receipt for any moneys due to the Trust and deposit the same in its own banking department (if a bank) or elsewhere as the Trustees may direct; (3) to disburse such funds upon orders or vouchers; (4) if authorized by the Trustees, to keep the books and accounts of the Trust and furnish clerical and accounting services; and (5) if authorized to do so by the Trustees, to compute the net income or net asset value of the Trust; all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. If so directed by a Majority Shareholder Vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote. The Trustees may also authorize each custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian and upon such terms and conditions, as may be agreed upon between the custodian and such sub- 22 custodian and approved by the Trustees, provided that in every case such sub-custodian shall meet the qualifications for custodians contained in the 1940 Act. 7.2 Central Certificate System. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other Person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities of any particular class of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust. ARTICLE VIII Redemption 8.1 Redemptions. The Shares of the Trust are not redeemable by the holders. 8.2 Disclosure of Holding. The holders of Shares or other securities of the Trust shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares or other securities of the Trust as the Trustees deem necessary to comply with the provisions of the Code, or to comply with the requirements of any other taxing or regulatory authority. 8.3 [Reserved]. 23 ARTICLE IX Determination of Net Asset Value Net Income and Distributions 9.1 Net Asset Value. The net asset value of each outstanding Share of the Trust shall be determined at such time or times on such days as the Trustees may determine, in accordance with the 1940 Act. The method of determination of net asset value shall be determined by the Trustees and shall be as set forth in the Prospectus or as may otherwise be determined by the Trustees. The power and duty to make the net asset value calculations may be delegated by the Trustees and shall be as generally set forth in the Prospectus or as may otherwise be determined by the Trustees. 9.2 Distributions to Shareholders. (a) The Trustees shall from time to time distribute ratably among the Shareholders such proportion of the net profits, surplus (including paid-in surplus), capital, or assets held by the Trustees as they may deem proper. Such distribution may be made in cash or property (including without limitation any type of obligations of the Trust or any assets thereof) or any combination thereof, and the Trustees may distribute ratably among the Shareholders additional Shares in such manner, at such times, and on such terms as the Trustees may deem proper. (b) In the event the Trust has outstanding more than one class of Shares, the Trustees shall from time to time distribute ratably among each class of Shareholders of the Trust such proportion of the net profits, surplus (including paid-in surplus), capital or assets attributable to such class held by the Trustees as they may deem proper or as may otherwise be determined in the instrument creating such class of Shares, and the Trustees may distribute ratably among the Shareholders of each class of the Trust additional Shares of such class in such manner, at such times, and on such terms as the Trustees may deem proper. Such distributions to one class need not be ratable with respect to distributions to Shares of any other class of the Trust. 24 (c) Distributions pursuant to this Section 9.2 may be among the Shareholders of record at the time of declaring a distribution or among the Shareholders of record at such later date as the Trustees shall determine and specify at the time of declaration. (d) The Trustees may always retain from the net profits such amount as they may deem necessary to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as they otherwise may deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business. (e) Inasmuch as the computation of net income and gains for Federal income tax purposes may vary from the computation thereof on the books, the above provisions shall be interpreted to give the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes. 9.3 Power to Modify Foregoing Procedures. Notwithstanding any of the foregoing provisions of this Article IX, the Trustees may prescribe, in their absolute discretion except as may be required by the 1940 Act, such other bases and times for determining the per share asset value of the Trust's Shares or net income, or the declaration and payment of dividends and distributions as they may deem necessary or desirable for any reason, including to enable the Trust to comply with any provision of the 1940 Act, or any securities association registered under the Securities Exchange Act of 1934, or any order of exemption issued by the Commission, all as in effect now or hereafter amended or modified. ARTICLE X Shareholders 10.1 Meetings of Shareholders. The Trust shall hold annual meetings of the Shareholders. A special meeting of Shareholders may be called at any time by a majority of the Trustees and shall be called by any 25 Trustee for any proper purpose upon written request of Shareholders of the Trust holding in the aggregate not less than 51% of the outstanding Shares of the Trust or class having voting rights, such request specifying the purpose or purposes for which such meeting is to be called. Any shareholder meeting, including a Special Meeting, shall be held within or without the State of Delaware on such day and at such time as the Trustees shall designate. 10.2 Voting. Shareholders shall have no power to vote on any matter except matters on which a vote of Shareholders is required by applicable law, this Declaration or resolution of the Trustees. Any matter required to be submitted to Shareholders and affecting one or more classes shall require separate approval by the required vote of Shareholders of each affected class; provided, however, that to the extent required by the 1940 Act, there shall be no separate class votes on the election or removal of Trustees, the selection of auditors for the Trust, approval of any agreement or contract entered into by the Trust or any action to liquidate or dissolve the Trust. Shareholders of a particular class shall not be entitled to vote on any matter that affects only one or more other classes. There shall be no cumulative voting in the election or removal of Trustees. The Trustees shall cause each matter required or permitted to be voted upon at a meeting or by written consent of Shareholders to be submitted to a vote of all classes of outstanding Shares entitled to vote thereon, unless the 1940 Act or other applicable law or regulations require that the actions of the Shareholders be taken by a separate vote of one or more classes, or the Trustees determine that any matter to be submitted to a vote of Shareholders affects only the rights or interests of one or more (but not all) classes of outstanding Shares, in which case only the Shareholders of the class or classes so affected shall be entitled to vote thereon. 10.3 Notice of Meeting and Record Date. Notice of all meetings of Shareholders, stating the time, place and purposes of the meeting, shall be given by the Trustees by mail to each Shareholder of record entitled to vote thereat at its registered address, mailed at least 10 days before the meeting or otherwise in compliance with applicable law. Only the business stated 26 in the notice of the meeting shall be considered at such meeting. Any adjourned meeting may be held as adjourned one or more times without further notice not later than 130 days after the record date. For the purposes of determining the Shareholders who are entitled to notice of and to vote at any meeting the Trustees may, without closing the transfer books, fix a date not more than 100 days prior to the date of such meeting of Shareholders as a record date for the determination of the Persons to be treated as Shareholders of record for such purposes. 10.4 Quorum and Required Vote. (a) The holders of a majority of outstanding Shares of the Trust present in person or by proxy shall constitute a quorum at any meeting of the Shareholders for purposes of conducting business on which a vote of Shareholders of the Trust is being taken. The holders of a majority of outstanding Shares of a class present in person or by proxy shall constitute a quorum at any meeting of the Shareholders of such class for purposes of conducting business on which a vote of Shareholders of such class is being taken. (b) Subject to any provision of applicable law requiring greater or lesser votes, this Declaration or resolution of the Trustees specifying a greater or lesser vote requirement for the transaction of any item of business at any meeting of Shareholders, (i) the affirmative vote of a majority of the Shares present in person or represented by proxy and entitled to vote on the subject matter shall be the act of the Shareholders with respect to such matter, and (ii) where a separate vote of any class is required on any matter, the affirmative vote of a majority of the Shares of such class present in person or represented by proxy at the meeting shall be the act of the Shareholders of such class with respect to such matter. 10.5 Proxies, etc. At any meeting of Shareholders, any holder of Shares entitled to vote thereat may vote by properly executed proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Secretary, or with such other officer or agent of the Trust as the Secretary may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a 27 resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or one or more of the officers or employees of the Trust. Only Shareholders of record shall be entitled to vote. Each full Share shall be entitled to one vote and fractional Shares shall be entitled to a vote of such fraction. When any Share is held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Share, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Share. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the holder of any such Share is a minor or a person of unsound mind, and subject to guardianship or to the legal control of any other person as regards the charge or management of such Share, he may vote by his guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. 10.6 Reports. The Trustees shall cause to be prepared at least annually and more frequently to the extent and in the form required by law, regulation or any exchange on which Trust Shares are listed a report of operations containing a balance sheet and statement of income and undistributed income of the Trust prepared in conformity with generally accepted accounting principles and an opinion of an independent public accountant on such financial statements. Copies of such reports shall be mailed to all Shareholders of record within the time required by the 1940 Act, and in any event within a reasonable period preceding the meeting of Shareholders. The Trustees shall, in addition, furnish to the Shareholders at least semi-annually to the extent required by law, interim reports containing an unaudited balance sheet of the Trust as of the end of such period and an unaudited statement of income and surplus for the period from the beginning of the current fiscal year to the end of such period. 10.7 Inspection of Records. The records of the Trust shall be open to inspection by Shareholders to 28 the same extent as is permitted shareholders of a Delaware business corporation. 10.8 Shareholder Action by Written Consent. Any action which may be taken by Shareholders by vote may be taken without a meeting if the holders entitled to vote thereon of the proportion of Shares required for approval of such action at a meeting of Shareholders pursuant to Section 10.4 consent to the action in writing and the written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. ARTICLE XI Duration: Termination of Trust; Amendment; Mergers, Etc. 11.1 Duration. Subject to possible termination in accordance with the provisions of Section 11.2 hereof, the Trust created hereby shall have perpetual existence. 11.2 Termination. (a) The Trust may be dissolved, after two thirds of the Trustees have approved a resolution therefor, upon approval by a majority of all the Shareholders voting as one class. Upon the dissolution of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, merger where the Trust is not the survivor, transfer or otherwise dispose of all or any part of the remaining Trust Property 29 to one or more Persons at public or private sale for consideration which may consist in whole or in part in cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, merger in which the Trust is not the survivor, transfer or other disposition of all or substantially all the Trust Property of the Trust shall require approval of the principal terms of the transaction and the nature and amount of the consideration by Shareholders with the same vote as required to open-end the Trust. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly each, among the Shareholders according to their respective rights. (b) After the winding up and termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination and shall execute and file a certificate of cancellation with the Secretary of State of the State of Delaware. Upon termination of the Trust, the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease. 11.3 Amendment Procedure. (a) Other than Sections 11.2 and 11.6, this Declaration may be amended, after a majority of the Trustees have approved a resolution therefor, by the affirmative vote of the holders of not less than a majority of the affected Shares. The Trustees also may amend this Declaration without any vote of Shareholders to divide the Shares of the Trust into one or more 30 classes or additional classes, to change the name of the Trust or any class, to make any change that does not adversely affect the relative rights or preferences of any Shareholder, as they may deem necessary, to conform this Declaration to the requirements of the 1940 Act or any other applicable federal laws or regulations including pursuant to Section 6.2 or the requirements of the regulated investment company provisions of the Code, but the Trustees shall not be liable for failing to do so. (b) No amendment may be made under Section 11.3(a) above, which would change any rights with respect to any Shares of the Trust by reducing the amount payable thereon upon liquidation of the Trust or by diminishing or eliminating any voting rights pertaining thereto, except with the vote of the holders of two-thirds of the Shares of the Trust. Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders. (c) An amendment duly adopted by the requisite vote of the Board of Trustees and, if required, the Shareholders as aforesaid, shall become effective at the time of such adoption or at such other time as may be designated by the Board of Trustees or Shareholders, as the case may be. A certification in recordable form signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Trustees and, if required, the Shareholders as aforesaid, or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust or at such other time designated by the Board. Notwithstanding any other provision hereof, until such time as a Registration Statement under the Securities Act of 1933, as amended, covering the first public offering of Shares of the Trust shall have become effective, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees. 31 11.4 Merger, Consolidation and Sale of Assets. The Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust Property or the property, including its good will, upon such terms and conditions and for such consideration when and as authorized by two-thirds of the Trustees and approved by a majority vote of the affected Shareholders and any such merger, consolidation, sale, lease or exchange shall be determined for all purposes to have been accomplished under and pursuant to the statutes of the State of Delaware. 11.5 Incorporation. Upon approval by Shareholders, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property to any such corporation, trust, limited liability company, association or organization in exchange for the shares or securities thereof, or otherwise, and to lend money to, subscribe for the shares or securities of, and enter into any contracts with any such corporation, trust, limited liability company, partnership, association or organization, or any corporation, partnership, trust, limited liability company, association or organization in which the Trust holds or is about to acquire shares or any other interests. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, limited liability company, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, limited liability companies, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organizations or entities. 11.6 Conversion. The Trust may be converted at any time from a "closed-end company" to an "open-end 32 company" as those terms are defined by the 1940 Act, upon the approval of such a proposal, together with the necessary amendments to this Declaration to permit such a conversion, by a majority of the Trustees then in office and by the holders of not less than two-thirds (66-2/3%) of the Trust's outstanding Shares entitled to vote, except that if such proposal is recommended by two-thirds of the total number of Trustees then in office, such proposal may be adopted by a Majority Shareholder Vote. From time to time, the Trustees may consider recommending to the Shareholders a proposal to convert the Trust from a "closed-end company" to an "open-end company." Upon the recommendation and subsequent adoption of such a proposal and the necessary amendments to this Declaration to permit such a conversion of the Trust's outstanding Shares entitled to vote, the Trust shall, upon complying with any requirements of the 1940 Act and state law, become an "open-end" investment company. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the Shares otherwise required by law, or any agreement between the Trust and any national securities exchange. 11.7 Certain Transactions. (a) Notwithstanding any other provision of this Declaration and subject to the exceptions provided in paragraph (d) of this Section, the types of transactions described in paragraph (c) of this Section shall require the affirmative vote or consent of the holders of eighty percent (80%) of the Shares of each class outstanding and entitled to vote, voting as a class, when a Principal Shareholder (as defined in paragraph (b) of this Section) is a party to the transaction. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of Shares otherwise required by law or by the terms of any class or series of preferred stock, whether now or hereafter authorized, or any agreement between the Trust and any national securities exchange. (b) The term "Principal Shareholder" shall mean any corporation, Person or other entity which is the beneficial owner, directly or indirectly, of five percent (5%) or more of the outstanding Shares and shall include any affiliate or associate, as such terms are defined in clause (ii) below, of a Principal Shareholder. For the purposes of this Section, in addition to the Shares which a corporation, Person or other entity beneficially owns 33 directly, (a) any corporation, Person or other entity shall be deemed to be the beneficial owner of any Shares (i) which it has the right to acquire pursuant to any agreement or upon exercise of conversion rights or warrants, or otherwise (but excluding share options granted by the Trust) or (ii) which are beneficially owned, directly or indirectly (including Shares deemed owned through application of clause (i) above), by any other corporation, Person or entity with which its "affiliate" or "associate" (as defined below) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of Shares, or which is its "affiliate" or "associate" as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, and (b) the outstanding Shares shall include Shares deemed owned through application of clauses (i) and (ii) above but shall not include any other Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights or warrants, or otherwise. (c) This Section shall apply to the following transactions: (i) The merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal Shareholder. (ii) The issuance of any securities of the Trust to any Principal Shareholder for cash(other than pursuant to any automatic dividend reinvestment plan). (iii) The sale, lease or exchange of all or any substantial part of the assets of the Trust to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period.) (iv) The sale, lease or exchange to the Trust or any subsidiary thereof, in exchange for securities of the Trust of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in 34 any series of similar transactions within a twelve-month period). (d) The provisions of this Section shall not be applicable to (i) any of the transactions described in paragraph (c) of this Section if two-thirds of the Board of Trustees of the Trust shall by resolution have approved a memorandum of understanding with such Principal Shareholder with respect to and substantially consistent with such transaction, or (ii) any such transaction with any corporation of which a majority of the outstanding shares of all classes of a stock normally entitled to vote in elections of directors is owned of record or beneficially by the Trust and its subsidiaries. (e) The Board of Trustees shall have the power and duty to determine for the purposes of this Section on the basis of information known to the Trust whether (i) a corporation, person or entity beneficially owns five percent (5%) or more of the outstanding Shares, (ii) a corporation, person or entity is an "affiliate" or "associate" (as defined above) of another, (iii) the assets being acquired or leased to or by the Trust or any subsidiary thereof constitute a substantial part of the assets of the Trust and have an aggregate fair market value of less than $1,000,000, and (iv) the memorandum of understanding referred to in paragraph (d) hereof is substantially consistent with the transaction covered thereby. Any such determination shall be conclusive and binding for all purposes of this Section. ARTICLE XII Miscellaneous 12.1 Filing. (a) This Declaration and any amendment hereto shall be filed in such places as may be required or as the Trustees deem appropriate. Each amendment shall be accompanied by a certificate signed and acknowledged by a Trustee stating that such action was duly taken in a manner provided herein, and shall, upon insertion in the Trust's minute book, be conclusive evidence of all amendments contained therein. A restated Declaration, containing the original Declaration and all amendments theretofore made, may be executed from time to time by a majority of the Trustees and shall, upon insertion in the Trust's minute book, be conclusive 35 evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto. (b) The trustee is hereby authorized and directed to execute and file a Certificate of Trust (attached as Exhibit A hereto) with the Delaware Secretary of State in accordance with the Delaware Business Trust Act. 12.2 Resident Agent. The Trust shall maintain a resident agent in the State of Delaware, which agent shall initially be The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801 The Trustees may designate a successor resident agent, provided, however, that such appointment shall not become effective until written notice thereof is delivered to the office of the Secretary of the State. 12.3 Governing Law. This Declaration is executed by the Trustees and delivered in the State of Delaware and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to laws of said State and reference shall be specifically made to the business corporation law of the State of Delaware as to the construction of matters not specifically covered herein or as to which an ambiguity exists, although such law shall not be viewed as limiting the powers otherwise granted to the Trustees hereunder and any ambiguity shall be viewed in favor of such powers. 12.4 Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. 12.5 Reliance by Third Parties. Any certificate executed by an individual who, according to the records of the Trust, or of any recording office in which this Declaration may be recorded, appears to be a Trustee hereunder, certifying to: (a) the number or identity of Trustees or Shareholders, (b) the name of the Trust, (c) the due authorization of the execution of any instrument or writing, (d) the form of any vote passed at 36 a meeting of Trustees or Shareholders, (e) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (f) the form of any By Laws adopted by or the identity of any officers elected by the Trustees, or (g) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any person dealing with the Trustees and their successors. 12.6 Provisions in Conflict with Law or Regulation. (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Declaration; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction. 37 IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. By: /s/ G. Moffett Cochran -------------------------- Name: G. Moffett Cochran 38 Exhibit A CERTIFICATE OF TRUST OF DLJ HIGH YIELD BOND FUND This Certificate of Trust of DLJ HIGH YIELD BOND FUND (the "Trust"), dated April 24, 1998, is being duly executed and filed by G. Moffett Cochran, as trustee, to form a business trust under the Delaware Business Trust Act (12 Del. C. Section 3801, et seq.). (c) Name. The name of the business trust formed hereby is DLJ HIGH YIELD BOND FUND. (d) Registered Office; Registered Agent. The business address of the registered office of the Trust in the State of Delaware is The Corporation Trust Company, 1209 Orange Street in the City of Wilmington, 19801. The name of the Trust's registered agent at such address is The Corporation Trust Company. (e) Effective Date. This Certificate of Trust shall be effective upon the date and time of filing. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first above-written. /S/ G. MOFFETT COCHRAN ------------------------- G. Moffett Cochran Sole Trustee 39 EX-99.2(H)(1) 3 UNDERWRITERS' AGREEMENT CONFORMED COPY 40,000,000 Shares DLJ HIGH YIELD BOND FUND COMMON STOCK PAR VALUE $.001 PER SHARE UNDERWRITING AGREEMENT July 27, 1998 Donaldson, Lufkin & Jenrette Securities Corporation Advest, Inc. Fac/Equities Fahnestock & Co. Inc. First of Michigan Corporation Gruntal & Co., L.L.C. Interstate/Johnson Lane Corporation Janney Montgomery Scott Inc. Johnston, Lemon & Co. Incorporated Sands Brothers & Co. Ltd. Sutro & Co. Incorporated Tucker Anthony Incorporated c/oDonaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs and Mesdames: DLJ High Yield Bond Fund, a Delaware business trust (the "Fund"), is a newly formed, non-diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended. The Fund proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters") 40,000,000 common shares of beneficial interest, par value $.001 per share (the "Firm Shares"). The Fund also proposes to issue and sell from time to time to the several Underwriters not more than an additional 6,000,000 common shares of beneficial interest, par value $.001 per share (the "Additional Shares"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares". The common shares of beneficial interest, $.001 par value per share, of the Fund to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Shares". SECTION 1. Registration Statement and Prospectus. The Fund has prepared and filed with the Securities and Exchange Commission (the "Commission") a notification on Form N-8A (the "Notification") of registration 2 of the Fund as an investment company and a registration statement on Form N-2, including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended, is hereinafter referred to as the "Registration Statement"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus". If the Fund has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Securities Act of 1933, as amended, registering additional shares of Common Shares (a "Rule 462(b) Registration Statement"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. The Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder are collectively referred to as the "Securities Act"; the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder are collectively referred to as the "Investment Company Act"; and the Securities Act and the Investment Company Act are collectively referred to as the "Acts". SECTION 2. Agreements to Sell and Purchase. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Fund agrees to issue and sell, and each Underwriter agrees, severally and not jointly, to purchase from the Fund at a price per Share of $10.00 (the "Purchase Price") the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Fund further agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to 6,000,000 Additional Shares from the Fund at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Fund within 60 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Fund the number of Additional Shares (subject to such adjustments to 3 eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Fund as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. For each of the Shares sold to the several Underwriters pursuant to this Agreement, the Investment Manger (not the Fund) agrees to pay or cause to be paid to Donaldson, Lufkin & Jenrette Securities Corporation for its own account and the account of each Underwriter a fee equal to an amount computed by multiplying (A) $0.50, by (B) the sum of the number of Shares purchased by Donaldson, Lufkin & Jenrette Securities Corporation and each such Underwriter on the Closing Date and any Option Closing Date (as defined below in Section 4). The Fund hereby agrees not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Shares (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Shares, or such other securities, in cash or otherwise), except to the Underwriters pursuant to this Agreement or as described in the Prospectus, including the Fund's Automatic Divided Reinvestment Plan (the "Plan"), for a period of 180 days after the date of the Underwriting Agreement without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. SECTION 3. Terms of Public Offering. The Fund and the Investment Manager are advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. SECTION 4. Delivery and Payment. The Shares shall be represented by definitive certificates and shall be issued in such authorized denominations and registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation shall request not later than two business days prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be. The Fund shall deliver the Shares, with any transfer taxes thereon duly paid by the Fund, to Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of The Depository Trust Company ("DTC"), for the respective accounts of the several Underwriters, against payment to the Fund of the Purchase Price therefor by wire transfer of Federal or other funds immediately available in New York City. The 4 certificates representing the Shares shall be made available for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date, as the case may be, at the office of DTC or its designated custodian (the "Designated Office"). The time and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time, on July 31, 1998 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Fund shall agree in writing. The time and date of delivery and payment for the Firm Shares are hereinafter referred to as the "Closing Date". The time and date of delivery and payment for any Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Fund shall agree in writing. The time and date of delivery and payment for any Additional Shares are hereinafter referred to as an "Option Closing Date". Payment of the Underwriters' fee described in the third paragraph of Section 2 hereof shall be made or caused to be made by the Investment Manager to Donaldson, Lufkin & Jenrette Securities Corporation for its own account and the account of each Underwriter in Federal or other funds immediately available in New York City on the Closing Date and any Option Closing Date. The documents to be delivered on the Closing Date or any Option Closing Date on behalf of the parties hereto pursuant to Section 10 of this Agreement shall be delivered at the offices of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017 and the Shares shall be delivered at the Designated Office, all on the Closing Date or such Option Closing Date, as the case may be. SECTION 5. Agreements of the Fund. (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Fund is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(e) below which makes any statement of a material fact made in the Registration 5 Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Fund will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To notify you immediately, and confirm such notice in writing, (i) of the institution of any proceedings pursuant to Section 8(e) of the Investment Company Act and (ii) of the happening of any event during the period described in Section 5(f) below which in the judgment of the Fund makes any statement in the Notification, the Registration Statement or the Prospectus untrue in any material respect or which requires the making of any change in or addition to the Notification, the Registration Statement or the Prospectus in order to make the statements therein not misleading in any material respect. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement or an order pursuant to Section 8(e) of the Investment Company Act, the Fund will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. (c) To furnish to you a signed copy of each of the Notification and the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Notification and the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (d) To prepare the Prospectus, the form and substance of which shall be reasonably satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in the relevant subsection of Rule 497(b) under the Securities Act; during the period specified in Section 5(e) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. 6 (e) Prior to 10:00 A.M., New York City time, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish in New York City to each Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (f) If during the period specified in Section 5(e), any event shall occur or condition shall exist as a result of which, in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter and to any dealer as many copies thereof as such Underwriter or dealer may reasonably request. (g) To use its best efforts to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). (h) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Fund shall not be required in connection therewith to qualify as a foreign entity in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. 7 (i) To mail and make generally available to its stockholders as soon as practicable an earnings statement covering the twelve-month period ending September 30, 1999 that shall satisfy the provisions of Section 11(a) of the Securities Act, and to advise you in writing when such statement has been so made available. (j) During the period of three years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Shares or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Fund is listed and such other publicly available information concerning the Fund as you may reasonably request. (k) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Fund's counsel and the Fund's accountants in connection with the registration and delivery of the Shares under the Acts and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Notification and the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement, the Fund Agreements (as defined in Section 7) and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Shares, (iv) all expenses in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in connection therewith (including the filing fees and fees and disbursements of counsel for the Underwriters in connection with such registration or qualification and memoranda relating thereto), (v) the filing fees and disbursements of counsel for the Underwriters in connection with the review and clearance of the offering of the Shares by the National Association of Securities Dealers, Inc., (vi) all fees and expenses in connection with the registration of the Shares under the Exchange Act and 8 all costs and expenses incident to the listing of the Shares on the New York Stock Exchange (the "NYSE"), (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar and/or depositary, and (ix) all other costs and expenses incident to the performance of the obligations of the Fund hereunder for which provision is not otherwise made in this Section 5(k). (l) To use its best efforts to list, subject to official notice of issuance, the Shares on the NYSE and to maintain the listing of the Shares on the NYSE for a period of three years after the date of this Agreement. (m) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Fund prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (n) If the Registration Statement at the time of the effectiveness of this Agreement does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Securities Act. SECTION 6. Agreements of the Investment Manager. The Investment Manager agrees with you and the Fund: (a) To use reasonable efforts to cause the Fund to comply with each of its covenants and agreements contained in Section 5 hereof. (b) In the event the transactions contemplated hereunder are not consummated, to pay all amounts which the Fund is obligated to pay under Section 5(k). SECTION 7. Representations and Warranties of the Fund. The Fund and the Investment Manager, jointly and severally, represent and warrant to each Underwriter that: (a) The Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Fund after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no 9 later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Fund after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Fund after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Acts and the Exchange Act, (iii) if the Fund is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) will comply in all material respects with the Acts and the Exchange Act and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Fund in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 497 under the Securities Act, complied when so filed in all material respects with the Acts, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in any preliminary prospectus based upon information relating to any Underwriter furnished to the Fund in writing by such Underwriter through you expressly for use therein. 10 (d) The Fund has been duly formed, is validly existing as a business trust in good standing under the laws of the State of Delaware and has the power and authority to carry on its business as described in the Prospectus and is duly qualified to do business and in good standing in each jurisdiction in which the nature of its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Fund. (e) The Fund is registered with the Commission as a non-diversified, closed-end management investment company under the Investment Company Act and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Fund or the Investment Manager, threatened by the Commission. No person is serving or acting as an officer or trustee of, or investment adviser to, the Fund except in accordance with the provisions of the Investment Company Act and the Investment Advisers Act of 1940, as amended, and the rules and regulations of the Commission thereunder (such act and rules being collectively referred to as the "Advisers Act"). (f) Each of this Agreement, the Investment Management Agreement between the Investment Manager and the Fund (the "Management Agreement"), the Services Agreement between First Data Investor Services Group, Inc.(the "Administrator") and the Fund (the "Administration Agreement"), the Global Custodial Services Agreement between Citibank N.A. (the "Custodian") and the Fund (the "Custodian Agreement"), the Transfer Agency and Services Agreement between First Data Investor Services Group, Inc. (the "Transfer and Dividend Disbursing Agent") and the Fund (the "Transfer Agency Agreement") (this Agreement, the Management Agreement, the Administration Agreement, the Custodian Agreement and the Transfer Agency Agreement are referred to herein, collectively, as the "Fund Agreements"), respectively, has been duly authorized, executed and delivered by the Fund. Each Fund Agreement, other than this Agreement, assuming due authorization, execution and delivery by the other parties thereto, and the Plan constitutes the legal, valid and binding obligation of the Fund, enforceable against the Fund in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity, regardless of whether considered in a proceeding in equity or at law. 11 (g) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Fund relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Fund, except as otherwise disclosed in the Registration Statement. (h) All the outstanding shares of capital stock of the Fund have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (i) The authorized capital stock of the Fund conforms in all material respects to the description thereof contained in the Prospectus, and the Agreement and Declaration of Trust dated as of April 24, 1998 (the "Declaration of Trust") and by-laws of the Fund, the Fund Agreements and the Plan conform in all material respects to the descriptions thereof contained in the Prospectus. (j) The Declaration of Trust and by-laws of the Fund, the Fund Agreements and the Plan comply with all applicable provisions of the Acts, and all approvals of such documents required under the Investment Company Act by the Fund's shareholders and trustees have been obtained and are in full force and effect. (k) The Fund is not in violation of the Declaration of Trust or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any agreement or instrument that is material to the Fund to which it is a party or by which it or its property is bound. (l) The Fund intends to direct the investment of the proceeds of the offering described in the Prospectus in such a manner as to comply with the requirements of Subchapter M of the Code, and the Fund is qualifies as a regulated investment company under Subchapter M of the Code. (m) The execution, delivery and performance by the Fund of each Fund Agreement, the compliance by the Fund with all the provisions thereof and the consummation of the transactions contemplated thereby will not (i) require any consent, approval, authorization or other order of, 12 or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the Declaration of Trust or by-laws of the Fund or any agreement or instrument that is material to the Fund to which it is a party or by which it or its property is bound, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over it or its property or (iv) result in the suspension, termination or revocation of any Authorization (as defined below) of the Fund or any other impairment of the rights of the holder of any such Authorization. (n) There are no legal or governmental proceedings pending or threatened to which the Fund is or could be a party or to which any of its property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (o) The Fund has such consents, orders (including exemptive orders), certificates, authorizations and other approvals (each, an "Authorization") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, as are necessary to own and use its assets and to conduct its business in the manner described in the Prospectus, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Fund. Each such Authorization is valid and in full force and effect and the Fund is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Fund; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event 13 or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Fund. (p) Ernst & Young LLP are independent public accountants with respect to the Fund as required by the Acts. (q) The statement of assets and liabilities included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), presents fairly the financial position of the Fund as of the date indicated and such statement has been prepared in accordance with generally accepted accounting principles. (r) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Fund from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) and (ii) there have been no transactions entered into by the Fund which are material to the Fund other than those in the ordinary course of its business or as described in the Prospectus. (s) The Fund Agreements (other than this Agreement) and the Plan are in full force and effect and neither the Fund nor, to the Fund's knowledge, any other party to any such agreement is in default thereunder and, to the knowledge of the Fund and the Investment Manager, no event has occurred which with the passage of time or the giving of notice or both would constitute a default thereunder. The Fund is not currently in breach of, or in default under, any other written agreement or instrument to which it or its property is bound or affected. (t) The Shares and any shares of Common Shares outstanding prior to the issuance of the Shares have been approved for listing on the NYSE, subject to official notice of issuance. (u) There are no material restrictions, limitations or regulations with respect to the ability of the Fund to invest its assets as described in the Prospectus, other than as described therein. 14 (v) Any advertisement used with the written consent of the Fund in the public offering of the Shares (an "Omitting Prospectus") does not contain an untrue statement of a material fact. SECTION 8. Representations and Warranties Relating to the Investment Manager. The Investment Manager represents and warrants to each Underwriter that: (a) The Investment Manager has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to carry on its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the nature of its business requires such qualification, except where failure to be so qualified would not have a material adverse effect on the Investment Manager. (b) The Investment Manager is duly registered as an investment adviser under the Advisers Act, and is not prohibited by the Investment Advisers Act of 1940 or the Investment Company Act from acting under the Management Agreement as an investment adviser to the Fund as contemplated by the Prospectus, and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Investment Manager, threatened by the Commission. (c) Each of this Agreement and the Management Agreement has been duly authorized, executed and delivered by the Investment Manager and complies with all applicable provisions of the Investment Company Act and the Investment Advisers Act. The Management Agreement, assuming due authorization, execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Investment Manager, enforceable against the Investment Manager in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity, regardless of whether considered in a proceeding in equity or at law. (d) The execution and delivery by the Investment Manager of, and the performance by the Investment Manager of its obligations under, this Agreement and the Management Agreement do not and will not contravene any provision of applicable law or the certificate of 15 incorporation or by-laws of the Investment Manager or any agreement or other instrument binding upon the Investment Manager that is material to the Investment Manager, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Investment Manager. No consent, approval, authorization, or other order of or qualification with, any court or governmental body or agency, self-regulatory agency or other tribunal is required for the performance by the Investment Manager of its obligations under this Agreement or the Management Agreement except such as have been obtained and as may be required by the Acts, the Exchange Act or the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (e) There are no legal or governmental proceedings pending or threatened, to which the Investment Manager is or could be a party or is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described. (f) The Investment Manager has such Authorizations of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, as are necessary to own and use its assets and to conduct its business in the manner described in the Prospectus, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Investment Manager. Each such Authorization is valid and in full force and effect and the Investment Manager is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Investment Manager; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Investment Manager. 16 (g) The Management Agreement is in full force and effect and neither the Investment Manager nor, to the Investment Manager's knowledge, the Fund is in default thereunder and, to the knowledge of the Investment Manager, no event has occurred which with the passage of time or the giving of notice or both would constitute a default under such document. (h) All information furnished by the Investment Manager for use in the Registration Statement and Prospectus, including, without limitation, the description of the Investment Manager, does not, and on the Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. (i) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Investment Manager from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). SECTION 9. Indemnification. (a) Each of the Fund and the Investment Manager, jointly and severally, agree to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto), any Omitting Prospectus or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Fund by such Underwriter through you expressly for use therein; provided that the foregoing indemnity agreement with respect to any Omitting Prospectus or preliminary 17 prospectus shall not inure to the benefit of any Underwriter who failed to deliver the Prospectus, as then amended or supplemented (so long as the Prospectus and any such amendment or supplement was provided by the Fund to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in such Omitting Prospectus or preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Prospectus, as so amended or supplemented, and such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person; provided further, that the Investment Manager will be required to indemnify and hold harmless any indemnified party pursuant to this paragraph only to the extent that the Fund fails to indemnify and hold harmless such indemnified party pursuant to this paragraph. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Fund and the Investment Manager, their respective trustees or directors, and each officer of the Fund who signs the Registration Statement and each person, if any, who controls the Fund or the Investment Manager within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Fund and the Investment Manager to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Fund by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto), any Omitting Prospectus or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 9(a) or 9(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 9(a) and 9(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 9(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and 18 expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of Underwriters, such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such separate firm for the Fund, and such trustees, officers and control persons of the Fund, such firm shall be designated in writing by the Fund. In the case of any such separate firm for the Investment Manager, and such directors and control persons of the Investment Manager, such firm shall be designated in writing by the Investment Manager. The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. 19 (d) To the extent the indemnification provided for in this Section 9 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the benefits received by the Fund and the Investment Manager on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 9(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Investment Manager on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Fund or the Investment Manager shall be deemed to equal the aggregate public offering price of the Shares. The benefits received by the Underwriters shall be deemed to equal the product of $0.50 times the aggregate number of Shares purchased by the Underwriters hereunder. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund or the Investment Manager on the one hand or the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Investment Manager agrees to pay or cause to be paid any amounts that are payable by the Fund pursuant to this paragraph to the extent that the Fund fails to make all contributions required to be made by the Fund pursuant to this paragraph. The Fund, the Investment Manager and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the 20 public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (e) The indemnity and contribution provisions contained in this Section 9 and the representations and warranties of the Fund and the Investment Manager contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, its officers or directors or any person controlling any Underwriter, the Investment Manager, its officers or directors or any person controlling the Investment Manager or the Fund, its trustees or directors or any person controlling the Fund and (iii) acceptance of and payment for any of the Shares. (f) The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. SECTION 10. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Fund and the Investment Manager contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Fund is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by G. Moffett Cochran and Martin Jaffe, in their capacities as the President and Vice-President of the Fund, 21 confirming the matters set forth in Sections 7(r), 10(a) and 10(b) and that the Fund has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Fund on or prior to the Closing Date. (d) You shall have received on the Closing Date a certificate dated the Closing Date, signed by G. Moffett Cochran and Martin Jaffe, in their capacities as the President and Chief Operating Officer of the Investment Manager, confirming the matters set forth in Sections 8(j), 10(a) and 10(b) and that the Investment Manager has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Investment Manager on or prior to the Closing Date. (e) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Fund or the Investment Manager, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) and (ii) there have been no transactions entered into by the Fund or the Investment Manager which are material to the Fund or the Investment Manager other than those in the ordinary course of their business or as described in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (f) You shall have received on the Closing Date an opinion (reasonably satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Fund, to the effect that: (i) the Fund has been duly formed, is validly existing as a business trust in good standing under the laws of the State of Delaware and has the power and authority to carry on its business as described in the Prospectus; (ii) the Fund is duly qualified and is in good standing to do business in each jurisdiction in which the nature of its business requires such qualification, except where the failure to be so 22 qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Fund; (iii) the Fund is registered with the Commission as a non-diversified, closed-end management investment company under the Investment Company Act and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the best of counsel's knowledge, threatened by the Commission; (iv) each Fund Agreement has been duly authorized, executed and delivered by the Fund. Each Fund Agreement, other than this Agreement, assuming due authorization, execution and delivery by the other parties thereto, and the Plan, constitutes the legal, valid and binding obligation of the Fund, enforceable against the Fund in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity, regardless of whether considered in a proceeding in equity or at law; (v) all the outstanding capital shares of the Fund have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; (vi) the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights; (vii) the authorized capital shares of the Fund conforms as to legal matters to the description thereof contained in the Prospectus, and the Declaration of Trust and by-laws of the Fund, conform in all material respects to the descriptions thereof contained in the Prospectus; (viii) the Shares have been approved for listing on the NYSE, subject to official notice of issuance; 23 (ix) the Fund does not require any tax or other rulings to enable it to qualify as a regulated investment company under Subchapter M of the Code; (x) the Registration Statement has become effective under the Acts, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to the best of such counsel's knowledge after due inquiry, pending before or contemplated by the Commission; (xi) the statements under the captions "Description of Shares" and "Taxes" in the Prospectus and Item 29 of Part C of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (xii) the Fund is not in violation of its Declaration of Trust or by-laws and, to the best of such counsel's knowledge after due inquiry, the Fund is not in default in the performance of any obligation, agreement, covenant or condition contained in any agreement or instrument that is material to the Fund, to which it is a party or by which its property is bound; (xiii) the execution, delivery and performance by the Fund of each Fund Agreement, the compliance by the Fund with all the provisions hereof and the consummation of the transactions contemplated thereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the Declaration of Trust or by-laws of the Fund or any agreement or instrument that is material to the Fund to which it is a party or by which it or its property is bound, (C) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over it or its property or (D) result in the suspension, termination or revocation of any Authorization of the Fund or any other impairment of the rights of the holder of any such Authorization; 24 (xiv) such counsel does not know of any legal or governmental proceedings pending or threatened to which the Fund is or could be a party or to which its property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (xv) the Fund has such Authorizations of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals as are necessary to own and use its assets and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Fund; each such Authorization is valid and in full force and effect and the Fund is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Fund; and (xvi) (A) the Registration Statement, the Notification, and the Prospectus and any supplement or amendment thereto (except for the financial statements and other financial data included therein as to which no opinion need be expressed) comply as to form with the Acts, (B) such counsel has no reason to believe that at the time the Registration Statement became effective or on the date of this Agreement, the Registration Statement and the prospectus included therein (except for the financial statements and other financial data as to which such counsel need not express any belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) such counsel 25 has no reason to believe that the Prospectus, as amended or supplemented, if applicable (except for the financial statements and other financial data, as aforesaid) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The opinion of Skadden, Arps, Slate, Meagher & Flom LLP described in Section 10(f) above shall be rendered to you at the request of the Fund and shall so state therein. (g) You shall have received on the Closing Date an opinion, dated the Closing Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Investment Manager, to the effect that: (i) the Investment Manager has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to carry on its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the nature of its business requires such qualification, except where failure to be so qualified would not have a material adverse effect on the Investment Manager; (ii) the Investment Manager is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the Investment Company Act from acting under the Management Agreement as an investment adviser to the Fund as contemplated by the Prospectus, and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Investment Manager, threatened by the Commission; (iii) each of this Agreement and the Management Agreement has been duly authorized, executed and delivered by the Investment Manager and complies with all applicable provisions of the Acts. The Management Agreement, assuming due authorization, execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Investment Manager, enforceable against the Investment Manager in accord ance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, 26 moratorium or similar laws affecting creditors' rights generally and by general principles of equity, regardless of whether considered in a proceeding in equity or at law; (iv) the execution and delivery by the Investment Manager of, and the performance by the Investment Manager of its obligations under, this Agreement and the Management Agreement do not and will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Investment Manager or any agreement or other instrument binding upon the Investment Manager that is material to the Investment Manager, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Investment Manager. No consent, approval, authorization, or other order of or qualification with, any court or governmental body or agency, self-regulatory agency or other tribunal is required for the performance by the Investment Manager of its obligations under this Agreement or the Management Agreement except such as have been obtained and as may be required by the Acts, the Exchange Act or the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares; (v) such counsel does not know of any legal or governmental proceedings pending or threatened, to which the Investment Manager is or could be a party or is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (vi) the Investment Manager has such Authorizations of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, as are necessary to own and use its assets and to conduct its business in the manner described in the Prospectus, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Investment Manager. Each such Authorization is valid and in full force and effect and the Investment Manager is in compliance 27 with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Investment Manager; and (vii) the description of the Investment Manager in the Registration Statement and Prospectus does not contain any untrue statement of a material fact or omit to state any material fact necessary to make such the statements therein, in light of the circumstances under which they were made, not misleading. (h) You shall have received on the Closing Date an opinion, dated the Closing Date, of Davis Polk & Wardwell, counsel for the Underwriters, as to the matters referred to in Sections 10(f)(iv) (but only as to this Agreement), 10(f)(vi), 10(f)(xi) (but only with respect to the statements under the caption "Description of Shares" and "Taxes") and 10(f)(xvi). In giving such opinions with respect to the matters covered by Section 10(f)(xvi) Skadden, Arps, Slate, Meagher & Flom LLP and Davis Polk & Wardwell may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (i) You shall have received on the Closing Date a certificate from a duly authorized officer of the Custodian certifying that the Global Custodial Services Agreement is in full force and effect and is the legal, valid, binding and enforceable obligation of the Custodian, assuming that such Agreement is a legal, valid, binding and enforceable obligation of the other party thereto. (j) You shall have received on the Closing Date a certificate from a duly authorized officer of the Transfer and Dividend Disbursing Agent, certifying that the Transfer Agency Agreement is in full force and effect and is the legal, valid, binding and enforceable obligation of the 28 Transfer and Dividend Disbursing Agent, assuming that such Agreement is a legal, valid, binding and enforceable obligation of the other party thereto. (k) You shall have received on the Closing Date a certificate from a duly authorized officer of the Administrator certifying that the Administration Agreement is in full force and effect and is the legal, valid, binding and enforceable obligation of the Administrator, assuming that such Agreement is a legal, valid, binding and enforceable obligation of the other party thereto. (l) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Ernst & Young LLP, independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to Underwriters regarding the Fund contained in the Registration Statement and the Prospectus. (m) All proceedings taken by the Fund and the Investment Manager in connection with the organization and registration of the Fund and the Shares under the Acts shall be satisfactory in form and substance to you and counsel for the Underwriters. (n) No proceedings shall have been instituted or threatened by the Commission which would adversely affect the Fund's standing as a registered investment company under the Investment Company Act or the standing of the Investment Manager as a registered investment adviser under the Advisers Act. (o) The Shares shall have been duly authorized for listing, subject only to official notice of issuance, on the NYSE. (p) The Fund and the Investment Manager shall not have failed on or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Fund and the Investment Manager on or prior to the Closing Date. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Fund and the Investment Manager, the due authorization and 29 issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. SECTION 11. Effectiveness of Agreement and Termination. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Fund if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the NYSE, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the NASDAQ National Market or limitation on prices for securities or other instruments on any such exchange or the NASDAQ National Market, (iii) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Fund, (iv) the declaration of a banking moratorium by either federal or New York State authorities or (v) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States and that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters 30 agreed but failed or refused to purchase on such date that in no event shall the number of Shares which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you and the Fund for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Fund and the Investment Manager. In any such case which does not result in termination of this Agreement, either you or the Fund shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. SECTION 12. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Fund, to DLJ High Yield Bond Fund, 277 Park Avenue, New York, New York 10172; (ii) if to the Investment Manager, to DLJ Investment Management Corp., 277 Park Avenue, New York, New York 10172; and (iii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Fund, the Investment Manager and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any person controlling any Underwriter, the Fund, the officers or 31 trustees of the Fund or any person controlling the Fund, the Investment Manager, the officers or directors of the Investment Manager or any person controlling the Investment Manager, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Shares are not delivered by or on behalf of the Fund as provided herein (other than as a result of any termination of this Agreement pursuant to Section 11), the Fund agrees to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) incurred by them. The Fund also agrees to reimburse the several Underwriters, their directors and officers and any persons controlling any of the Underwriters for any and all fees and expenses (including, without limitation, the fees and disbursements of counsel) incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 9 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Fund, the Investment Manager, the Underwriters, the Underwriters' directors and officers, any controlling persons referred to herein, the Fund's and the Investment Manager's trustees or directors and the Fund's officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 32 Please confirm that the foregoing correctly sets forth the agreement between the Fund, the Investment Manager and the several Underwriters. Very truly yours, DLJ HIGH YIELD BOND FUND /s/ Martin Jaffe By: --------------------------------- Title: Vice President DLJ INVESTMENT MANAGEMENT CORP. /s/ Martin Jaffe By: --------------------------------- Title: Chief Operating Officer DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ADVEST, INC. FAC/EQUITIES FAHNESTOCK & CO. INC. FIRST OF MICHIGAN CORPORATION GRUNTAL & CO., L.L.C. INTERSTATE/JOHNSON LANE CORPORATION JANNEY MONTGOMERY SCOTT INC. JOHNSTON, LEMON & CO. INCORPORATED SANDS BROTHERS & CO. LTD. SUTRO & CO. INCORPORATED TUCKER ANTHONY INCORPORATED Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION /s/ Craig Sim By: ----------------------------- Title: Managing Director 33 SCHEDULE I
Number of Firm Shares Underwriters to be Purchased - ------------ --------------------- Donaldson, Lufkin & Jenrette Securities Corporation 2,159,100 Advest, Inc. 2,159,090 FAC/Equities 2,159,090 Fahnestock & Co. Inc. 2,159,090 First of Michigan Corporation 2,159,090 Gruntal & Co., L.L.C. 2,159,090 Interstate/Johnson Lane Corporation 2,150,090 Janney Montgomery Scott Inc. 2,159,090 Johnston, Lemon & Company Incorporated 2,159,090 Sands Brothers & Co. Ltd. 2,159,090 Sutro & Co. Incorporated 2,159,090 Tucker Anthony Incorporated 2,159,090 ABN AMRO Chicago Corporation 500,000 BT Alex.Brown Incorporated 500,000 CIBC Oppenheimer Corp. 500,000 A.G. Edwards & Sons, Inc. 500,000 ING Baring Furman Selz LLC 500,000 Lazard Freres & Co. LLC 500,000 PaineWebber Incorporated 500,000 Schroder & Co. Inc. 500,000 Adams, Harkness & Hill, Inc. 250,000 Arnhold and S. Bleichroeder, Inc. 250,000 Robert W. Baird & Co. Incorporated 250,000 Barington Capital Group, L.P. 250,000 George K. Baum & Company 250,000 Black & Company, Inc. 250,000 J.C. Bradford & Co. 250,000 Burnham Securities Inc. 250,000 Charsworth Securities, Inc. 250,000
Number of Firm Shares Underwriters to be Purchased - ------------ --------------------- Cleary, Gull, Reiland & McDevitt Inc. 250,000 Crowell, Weedon & Co. 250,000 Dain Rauscher Wessels 250,000 Dominick & Dominick, Incorporated 250,000 Suntrust Equitable Securities Corporation 250,000 EVEREN Securities, Inc. 250,000 Ferris, Baker Watts, Inc. 250,000 Fifth Third/The Ohio company 250,000 Jefferies & Company 250,000 Josephthal & Co. Inc. 250,000 C.L. King & Associates, Inc. 250,000 Laidlaw Global Securities, Inc. 250,000 Legg Mason Wood Walker, Incorporated 250,000 Maxus Securities Corp. 250,000 McClurg Capital Corporation 250,000 McDonald & Company Securities, Inc. 250,000 Morgan Keegan & Company, Inc. 250,000 Needham & Company, Inc. 250,000 Noble Investment Co. of Palm Beach 250,000 Ormes Capital Markets, Inc. 250,000 Parker/Hunter Incorporated 250,000 Peacock, Hislop, Staley & Given 250,000 Pennsylvania Merchant Group 250,000 Piper Jaffray Inc. 250,000 Ragen Mackenzie Incorporated 250,000 The Robinson-Humphrey Company, LLC 250,000 Roney Capital Markets 250,000 Ryan, Beck & Co. 250,000 Sanders Morris Mundy Inc. 250,000 Scott & Stringfellow, Inc. 250,000 Stephens Inc. 250,000
2
Number of Firm Shares Underwriters to be Purchased - ------------ --------------------- Sufel, Nicolaus & Company, Incorporated 250,000 Stone & Youngberg 250,000 TD Securities 250,000 C.E. Unterberg, Towbin 250,000 Van Kasper & Company 250,000 ------- Total 40,000,000 ==========
3 EX-99.2(L) 4 OPINION AND CONSENT OF SPECIAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 919 THIRD AVENUE NEW YORK 10022-3897 ------------------- (212) 735-3000 July 30, 1998 DLJ High Yield Bond Fund 277 Park Avenue New York, NY 10172 Re: DLJ High Yield Bond Fund Registration on Form N-2 ------------------------ Ladies and Gentlemen: We have acted as special counsel to DLJ High Yield Bond Fund, a business trust formed under the Delaware Business Trust Act (Chapter 38, Title 12, of the Delaware Code, 12 Del. C. ss. 3801 et seq.) (the "Trust"), in connection with the initial public offering by the Trust of up to 46,000,000 shares (including 6,000,000 shares subject to an over-allotment option) (the "Shares") of the Trust's Common Shares of Beneficial Interest, par value $.001 per share (the "Common Interests"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Notification of Registration of the Trust as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), on Form N-8A, as filed with the Securities and Exchange Commission (the "Commission") on May 11, 1998 under the 1940 Act; (ii) the Registration Statement on Form N-2 (File Nos. 33-52373 and 811-8777), as filed with the Commission on May 11, DLJ High Yield Bond Fund July 30, 1998 Page 2 1998 under the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act, Pre-Effective Amendment No. 1 thereto, as filed with the Commission on June 25, 1998, Pre-Effective Amendment No. 2 thereto, as filed with the Commission on July 27, 1998 and Post-Effective Amendment No. 1 thereto, as filed with the Commission on July 30, 1998 (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (iii) the form of the Underwriting Agreement (the "Underwriting Agreement") proposed to be entered into between the Trust, as issuer, and Donaldson, Lufkin & Jenrette Securities Corporation, Advest, Inc., First Albany Corporation, Fahnestock & Co., Inc. First of Michigan Corporation, Gruntal & Co., L.L.C., Interstate/Johnson Lane Corporation, Janney Montgomery Scott Inc., Sands Brothers & Co., Ltd., Sutro & Co. Incorporated, Tucker Anthony Incorporated and Johnston, Lemon & Co. Inc., as representatives of the several underwriters named therein (the "Underwriters"), filed as an exhibit to the Registration Statement; (iv) a specimen certificate representing the Common Interests; (v) the Agreement and Declaration of Trust of the Trust, as currently in effect (the "Declaration"); (vi) the By-Laws of the Trust, as currently in effect; and (vii) certain resolutions of the Board of Trustees of the Trust relating to the issuance and sale of the Shares and related matters. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Trust and such agreements, certificates of public officials, certificates of officers or other representatives of the Trust and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all 2 DLJ High Yield Bond Fund July 30, 1998 Page 3 signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed, facsimile or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed by parties other than the Trust, we have assumed that such parties had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Trust and others. Members of our firm are admitted to the bar in the States of New York and Delaware, and we do not express any opinion as to any laws other than the Delaware Business Trust Act. Based upon and subject to the foregoing, we are of the opinion that when (i) Post-Effective Amendment No. 1 to the Registration Statement becomes effective; (ii) the Underwriting Agreement has been duly executed and delivered; and (iii) the Shares have been duly issued, executed and authenticated in accordance with the Declaration and delivered and paid for in accordance with the Underwriting Agreement, the issuance and sale of the Shares will have been duly authorized, and the Shares will be validly issued, fully paid and nonassessable. In rendering this opinion we have assumed that if a shareholder requests a certificate representing Common Interests that such certificate will conform to the specimen examined by us and will have been manually signed by an authorized officer of the transfer agent and 3 DLJ High Yield Bond Fund July 30, 1998 Page 4 registrar for the Common Interests and registered by such transfer agent andregistrar. We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the Commission. Very truly yours, /S/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 4 -----END PRIVACY-ENHANCED MESSAGE-----