-----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, DCeHAu8brxpPW3QDnWQx1c8Z3CMFJeCssuXMmT2/YNrz57JeXP25lNGX8/6jJyxJ IOjGc6xki5oP5xMOsBwp3Q== 0000898432-98-000773.txt : 19981118 0000898432-98-000773.hdr.sgml : 19981118 ACCESSION NUMBER: 0000898432-98-000773 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGH YIELD PLUS FUND INC CENTRAL INDEX KEY: 0000828990 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 333-67339 FILM NUMBER: 98750562 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 811-05468 FILM NUMBER: 98750563 BUSINESS ADDRESS: STREET 1: GATEWAY CENTER THREE 100 MULBERRT ST CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 2013671495 MAIL ADDRESS: STREET 1: GATEWAY CENTER THREE 100 MULBERRY STREET CITY: NEWARK STATE: NJ ZIP: 07102 N-2 1 THE HIGH YIELD PLUS FUND, INC. As Filed With The Securities And Exchange Commission On November 16, 1998 Securities Act File No.: _____________ Investment Company Act File No. 811-5468 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-2 Registration Statement Under The Securities Act Of 1933 [X] Pre-Effective Amendment No. __________ [ ] Post-Effective Amendment No.___________ [ ] and/or Registration Statement Under The Investment Company Act Of 1940 [ ] Amendment No. 7 [X] --- The High Yield Plus Fund, Inc. (Exact Name of Registrant as Specified in Charter) Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (Address of Principal Executive Office) (973) 367-XXXX (Registrant's Telephone Number, including Area Code) David Connor, Esq. Prudential Investments Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 With Copies to: Stephanie A. Djinis, Esq. Kirkpatrick & Lockhart LLP 1800 Massachusetts Ave., N.W. Washington, D.C. 20036 Leonard B. Mackey, Jr., Esq. Rogers & Wells LLP 200 Park Avenue New York, NY 10166-0153 Approximate Date Of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement. 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. [X] Calculation Of Registration Fee Under The Securities Act Of 1933 PROPOSED PROPOSED TITLE OF MAXIMUM MAXIMUM SECURITIES BEING AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF REGISTERED REGISTERED PER SHARE(1) OFFERING REGISTRATION PRICE(1) FEE Shares of Common Stock 3,800,000 $7.38 $28,044,000 $7,796.23 (1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933. Based on the net asset value per share of common stock on November 11, 1998. EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effectiveness until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. THE HIGH YIELD PLUS FUND, INC. FORM N-2 CROSS REFERENCE SHEET ITEM NUMBER AND HEADING CAPTION IN PROSPECTUS PART A 1. Outside Front Cover Cover Page 2. Inside Front and Outside Back Cover Cover Page Page 3. Fee Table and Synopsis Fee Table: Summary 4. Financial Highlights Financial Highlights 5. Plan of Distribution Cover Page; Summary; The Offer 6. Selling Stockholders Not Applicable 7. Use of Proceeds Use of Proceeds 8. General Description of the Registrant Cover Page; Summary; The Fund; Investment Policies and Limitations; Risk Factors and Special Considerations; Financial Highlights; Information Regarding Senior Securities; Description of Common Stock; Description of Credit Agreement 9. Management Summary; The Adviser and The Administrator; Information Regarding Senior Securities; Management of the Fund; Description of Credit Agreement; Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar 10. Capital Stock, Long-Term Debt and Description of Credit Agreement; Other Securities Information Regarding Senior Securities; Description of Common Stock; Federal Taxation; Investment Policies and Limitations; Dividends and Distributions: Dividend Reinvestment Plan; Financial Highlights 11. Defaults and Arrears on Senior Not Applicable Securities 12. Legal Proceedings Not Applicable 13 Table of Contents of the Statement of Not Applicable Additional Information PART B 14. Cover Page Not Applicable 15. Table of Contents Not Applicable 16. General Information and History Not Applicable 17. Investment Objective and Policies Cover Page; Summary; The Fund; Investment Policies; Limitations; Investment Restrictions; Risk Factors and Special Considerations 18. Management Management of the Fund 19. Control Persons and Principal Holders Management of the Fund of Securities 20. Investment Advisory and Other Services Summary; The Offer; The Fund, Management of the Fund; Custodian; Transfer Agent; Dividend Disbursing Agent and Registrar 21. Brokerage Allocation and Other Management of the Fund Practices 22. Tax Status The Offer; Federal Taxation 23. Financial Highlights Financial Highlights Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to notification under the securities laws of any such state. SUBJECT TO COMPLETION The High Yield Plus Fund, Inc. __________ Shares of Common Stock Issuable Upon Exercise of __________ Transferable Rights to Subscribe for Such Shares -------------------------- The High Yield Plus Fund, Inc. (the "Fund") is issuing to its shareholders of record ("Record Date Shareholders") as of the close of business on December __, 1998 (the "Record Date") transferable rights ("Rights") entitling the holders thereof to subscribe for an aggregate of ________shares of common stock of the Fund ("Shares"), par value $0.01 per Share (the "Offer"). YOU WILL RECEIVE ONE RIGHT FOR EACH THREE SHARES YOU HOLD ON THE RECORD DATE. The Rights entitle you to subscribe for Shares at the rate of one Share for every one Right held. The Rights further entitle you to subscribe, subject to certain limitations and subject to allotment, for any Shares not acquired by other shareholders in the primary subscription (the "Over-Subscription Privilege"). The Rights are transferable and will be listed for trading on the New York Stock Exchange under the symbol "____." The Shares trade on the New York Stock Exchange under the symbol "HYP." The subscription price for each Share to be issued pursuant to the Offer will be __________ as of the close of business on the expiration date of the Offer (the "Subscription Price"). You will not know the actual Subscription Price at the time of exercise. You therefore will be required initially to pay for the Shares at the estimated Subscription Price of $______ per Share (based on the Fund's net asset value on ______________) ("Estimated Subscription Price"). Once you subscribe for Shares and your payment is received, you will not be able to change your decision. The Fund announced its intention to make the Offer after the close of trading on the New York Stock Exchange on November [16], 1998. The net asset value per Share at the close of business on _______ and _______ was $____ and $____, respectively, and the closing market price per Share on the New York Stock Exchange on those dates was $_____ and $____, respectively. The Offer will expire at 5:00 p.m., Eastern time, on _______, 1999, unless extended by the Fund. If you do not fully exercise your Rights you should expect that you will, at the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. The Fund is a diversified, closed-end management investment company registered under the Investment Company Act of 1940. The Fund's primary investment objective is to provide a high level of current income. A secondary objective is capital appreciation, but only when consistent with its primary objective. The Fund invests in a professionally managed, diversified portfolio made up primarily of lower rated "high yield, high risk" fixed income securities (commonly referred to as "junk bonds") and other types of high risk securities. Lower rated securities generally involve greater risks, including risk of default, volatility of price and risks to principal and income, than securities in higher rating categories. The Fund maintains a leveraged capital structure, through bank borrowings, which creates the opportunity for greater total returns, but also involves certain substantial additional risks. An investment in the Fund is not appropriate for all investors, and no assurance can be given that the Fund will achieve its investment objectives. See "The Fund" and "Risk Factors and Special Considerations" on page ___. Further information concerning the Fund and the securities in which it invests can be found in the Fund's registration statement, of which this Prospectus constitutes a part, on file with the Securities and Exchange Commission. In connection with this offering, A.G. Edwards & Sons, Inc., which has been retained by the Fund as the dealer-manager for the Offer, may effect transactions that stabilize or maintain the market price of the Rights and the Shares at levels above those that might otherwise prevail in the open market. Such transactions may be effected on the New York Stock Exchange, on the NASDAQ Stock Market or otherwise. Such transactions, if commenced, may be discontinued at any time. These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the Securities and Exchange Commission passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense. PER SHARE TOTAL Estimated Subscription Price $ $ Sales Load $ $ Estimated Proceeds to Fund $ $ This Prospectus sets forth concisely the information about the Fund that a prospective investor ought to know before investing. Investors are advised to read this Prospectus and to retain it for future reference. ALL QUESTIONS AND INQUIRIES RELATING TO THE OFFER SHOULD BE DIRECTED TO SHAREHOLDER COMMUNICATIONS CORPORATION TOLL FREE AT (800) 733-8481, EXT. 486. The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077, and its telephone number is (973) 367-XXXX. ---------------------- A.G. Edwards & Sons, Inc. The date of this Prospectus is ______, 1998 TABLE OF CONTENTS PAGE SUMMARY......................................................................1 FINANCIAL HIGHLIGHTS.........................................................7 CAPITALIZATION AT SEPTEMBER 30, 1998.........................................9 INFORMATION REGARDING SENIOR SECURITIES......................................9 TRADING AND NET ASSET VALUE INFORMATION.....................................10 THE OFFER...................................................................10 USE OF PROCEEDS.............................................................23 THE FUND....................................................................24 INVESTMENT POLICIES AND LIMITATIONS.........................................26 INVESTMENT RESTRICTIONS.....................................................36 RISK FACTORS AND SPECIAL CONSIDERATIONS.....................................37 DIVIDENDS AND OTHER DISTRIBUTIONS: DIVIDEND REINVESTMENT PLAN...............41 MANAGEMENT OF THE FUND......................................................43 NET ASSET VALUE.............................................................48 FEDERAL TAXATION............................................................49 DESCRIPTION OF COMMON STOCK.................................................53 CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS.............53 DESCRIPTION OF CREDIT AGREEMENT.............................................54 CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR..........................................................56 LEGAL OPINIONS..............................................................56 REPORTS TO SHAREHOLDERS.....................................................56 EXPERTS.....................................................................56 FURTHER INFORMATION.........................................................56 FINANCIAL STATEMENTS..................................................................F-1 REPORT OF INDEPENDENT ACCOUNTANTS.................................................................. APPENDIX A..................................................................A-1 APPENDIX B..................................................................B-1 SUMMARY The following summary is qualified in its entirety by the more detailed information included elsewhere in this Prospectus. PURPOSE OF THE OFFER The Board of Directors of the Fund has determined that it is in the best interests of the Fund and its shareholders to increase the number of outstanding Shares of the Fund and to increase the assets of the Fund available for investment. In reaching its decision, the Board noted that investment opportunities in the lower rated "high yield, high risk" fixed income securities market have broadened on a worldwide basis, and that many more investment opportunities for the Fund exist now than in the recent past. The Board concluded that an increase in the assets of the Fund would permit the Fund to take advantage of these attractive investment opportunities, consistent with the Fund's investment objectives, while retaining attractive investments in the Fund's portfolio. The Board considered that the Offer: (1) May permit the Fund to increase the diversity of its portfolio (thereby potentially lowering overall risk) and may enhance the Fund's ability to buy and sell larger blocks of securities on better terms, and (2) May improve the Fund's ability to participate in investments, mainly U.S. dollar-based, on a global basis. The Board believes that the Offer would permit the Fund to accomplish these objectives while allowing existing shareholders an opportunity to purchase additional Shares at a price below market value without paying a brokerage commission. IMPORTANT TERMS OF THE OFFERING Estimated Subscription Price...................$ Shares outstanding at December ___, 1998....... Number of Rights issued........................ Number of Rights issued per existing Shares... 1 Right for each 3 Shares held Subscription ratio............................. 1 Right to buy 1 Share Maximum number of Shares to be issued.......... HOW TO EXERCISE RIGHTS . If your existing Shares are held in a brokerage account or by a custodian bank or trust company, contact your broker or financial adviser for additional instructions on how to participate in the Offer. . Complete, sign and date the enclosed subscription certificate. . Make your check or money order payable to "The High Yield Plus Fund, Inc." in the amount of $___________ for each Share you wish to buy, including any Shares you wish to buy pursuant to the Over-Subscription Privilege. This payment may be more or less than the actual Subscription Price. Additional payment may be required when the actual Subscription Price is determined. . You should mail the subscription certificate and your payment in the enclosed envelope to State Street Bank and Trust Company in a manner that will ensure receipt prior to 5:00 p.m., Eastern time, on January ___, 1999, unless extended. Once you subscribe for Shares and your payment is received, you will not be able to change your decision. See "The Offer -- Method for Exercising Rights" and "The Offer -- Payment for Shares." IMPORTANT DATES TO REMEMBER . RECORD DATE DECEMBER ___, 1998 . FINAL DATE FOR SALES OF RIGHTS ________________ . EXPIRATION DATE (PAYMENT FOR SHARES JANUARY ___, 1999 (UNLESS AND NOTICES OF GUARANTEED DELIVERY EXTENDED) DUE) . DUE DATE FOR DELIVERY BY BROKERAGE JANUARY ___, 1999 (UNLESS FIRMS OR CUSTODIAN BANKS OF EXTENDED) PAYMENT AND SUBSCRIPTION CERTIFICATES TO SUBSCRIPTION AGENT PURSUANT TO NOTICE OF GUARANTEED DELIVERY . MAILING OF SHARES NOT LATER THAN JANUARY ___, 1999 (UNLESS EXTENDED) SHAREHOLDERS SHOULD DIRECT THEIR QUESTIONS TO THE INFORMATION AGENT: Shareholder Communications Corporation 17 State Street, 27th Floor New York, New York 10004 Toll Free: (800) 733-8481, ext. 486 TERMS OF THE OFFER The Fund is issuing Rights to its Record Date Shareholders. These Rights entitle you to subscribe for Shares at the rate of one Share for every one Right held by you. You will receive one Right for each three Shares you hold on the Record Date. For example, if you own 300 Shares, you will receive 100 Rights entitling you to purchase up to 100 additional Shares at the Subscription Price. You may exercise Rights at any time from the date of this Prospectus until 5:00 p.m., Eastern time, on January ___, 1999, unless extended. In addition, if you subscribe for the maximum number of Shares to which you are entitled, you may also subscribe for Shares that were not otherwise subscribed for by other shareholders. Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, which is more fully discussed below under "The Offer -- Over-Subscription Privilege" on page ___. -2- The Subscription Price per Share is _____ as of the close of business on the expiration date. The Rights are transferable and will trade on the New York Stock Exchange. See "The Offer -- Sale of Rights." THE FUND The Fund is a diversified, closed-end management investment company. The Fund's primary investment objective is to provide a high level of current income. Its secondary objective is capital appreciation, but only when consistent with its primary objective. The Fund invests in a portfolio comprised primarily of lower rated "high yield, high risk" fixed income securities (commonly referred to as "junk bonds") and other types of high risk securities. The Fund maintains a leveraged capital structure, through bank borrowings, which creates the opportunity for greater total returns, but also involves certain substantial additional risks. As discussed more fully in the body of this Prospectus, investment in the Fund involves a number of significant and substantial risks, including: (1) The possibility that the lower rated securities and other high risk securities in which the Fund primarily invests may be more likely to default and more volatile than other debt securities. (2) The Fund's leveraged capital structure, which will exaggerate any increases or decreases in the net asset value of Shares and in the yield on the Fund's portfolio. (3) The fluctuation of the Fund's net asset value in connection with changes in the value of its portfolio securities. (4) Risks associated with the Fund's investments in foreign securities and in certain restricted and illiquid securities. No assurance can be given that the Fund will achieve its investment objectives. In addition, the rights offering involves the risk of an immediate dilution of the aggregate net asset value of your Shares if you do not fully exercise your Rights. THE INVESTMENT ADVISER Wellington Management Company, LLP, with its principal offices at 75 State Street, Boston, Massachusetts, 02109, has served as the Fund's investment adviser since 1988, when the Fund was organized. As of September 30, 1998, Wellington Management: (1) Has discretionary authority over $187 billion of assets, including $79 billion of fixed income securities of which $6.6 billion represents "high-yield" investments. (2) Has provided investment advisory services to investment companies since 1933 and to investment counseling clients since 1960. -3- Catherine Smith, Senior Vice President of Wellington Management, has managed the Fund since its inception. THE ADMINISTRATOR Prudential Investments Fund Management LLC is the administrator of the Fund. It provides meeting facilities for the Board of Directors and shareholders of the Fund and office facilities and personnel to assist the officers of the Fund in the performance of certain services. ------------------------- Before exercising your Rights pursuant to the Offer, you should consider the factors described in this Prospectus, including without limitation, the factors described under "The Fund," "Investment Objectives and Policies" and "Risk Factors and Special Considerations." These factors include the effects of the Offer, the effects of the Fund's use of bank borrowings, the significant and substantial risks involved in investing in lower rated high yield, high risk fixed income securities, the limitations on the ability of the Fund to pay dividends if it fails to meet certain asset coverage requirements, and the fact that Shares sometimes trade above or below their net asset value. -4- FEE TABLE AND EXAMPLE The following Fee Table and Example are intended to assist investors in understanding the costs and expenses that an investor in the Fund will bear directly or indirectly. FEE TABLE: SHAREHOLDER TRANSACTION EXPENSES Sales Load (as a percentage of the Subscription Price per Share) (1) 3.50% ANNUAL EXPENSES (as a percentage of average weekly net assets attributable to Shares) (2) Investment Advisory Fees...................................... 0.50% Administration Fees ....................................... 0.20% Interest...................................................... 1.93% Other Expenses................................................ 0.32% ======== Total Annual Expenses............................. 2.95% ======== (1) The Fund has agreed to pay A.G. Edwards & Sons, Inc. (the "Dealer-Manager") a fee for its financial advisory, marketing and soliciting services equal to (a) 3.50% of the Subscription Price per Share for Shares issued pursuant to the exercise of the Rights and the Over-Subscription Privilege, less (b) a $25,000 retainer fee paid to the Dealer-Manager by the Fund pursuant to a letter agreement between the Fund and the Dealer-Manager. The Dealer-Manager will reallow soliciting fees to broker-dealers who have entered into a Soliciting Dealer Agreement with the Dealer-Manager equal to 2.50% of the Subscription Price per Share for Shares issued pursuant to the exercise of the Rights and the Over-Subscription Privilege. The Fund has also agreed to reimburse the Dealer-Manager for its out-of-pocket costs and expenses relating to the Offer up to an aggregate of $50,000; provided, however, that if fewer than 1,900,000 Shares are issued upon the exercise of Rights in connection with the Offer, such reimbursement will be limited to a maximum of $25,000. In addition, the Fund has agreed to pay fees to the subscription agent and the information agent, estimated to be $_______ and $________, respectively, for their services related to the Offer, excluding reimbursement for their out-of-pocket expenses. These fees and expenses will be borne by the Fund and indirectly by all of the Fund's shareholders, including those shareholders who do not exercise their Rights. (2) Amounts are based on estimated amounts for the Fund's current fiscal year after giving effect to anticipated net proceeds of the Offer, assuming that all of the Rights are exercised and assuming that the Fund is able to increase the amount it may borrow under its credit agreement with BankBoston, N.A. to the maximum amount then permissible under the Investment Company Act of 1940 ("1940 Act"). -5- EXAMPLE: CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: 1 YEAR 3 YEARS 5 YEARS 10 YEARS An investor would pay the following expenses on a $1,000 investment, assuming a 5% annual return throughout the periods.......... $30 $91 $155 $327 The Example set forth above assumes reinvestment of all dividends and other distributions at net asset value, and an annual expense ratio of 2.95%. The Fee Table above and the assumption in the Example of a 5% annual return are required by Securities and Exchange Commission ("Commission") regulations applicable to all management investment companies. THE EXAMPLE AND FEE TABLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, WHICH MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE AND FEE TABLE. In addition, while the Example assumes reinvestment of all dividends and other distributions at net asset value, participants in the Fund's Dividend Reinvestment Plan may receive Shares purchased or issued at a price or value different from net asset value. See "Dividends and Other Distributions; Dividend Reinvestment Plan." -6- FINANCIAL HIGHLIGHTS The table below sets forth certain specified information for a Share outstanding throughout each period presented. The financial highlights for the fiscal years ended March 31, 1998 and 1997 have been audited by PricewaterhouseCoopers LLP, the Fund's independent accountants, whose reports thereon were unqualified. The financial highlights for the remaining periods (other than for the period ended September 30, 1998) have been audited by Deloitte & Touche LLP. The financial highlights for the period ended September 30, 1998 have not been audited. This information should be read in conjunction with the Financial Statements and Notes thereto included in the Fund's March 31, 1998 Annual Report and September 30, 1998 Semi-Annual Report and included in this Prospectus.
Year Ended March 31, ---------------------------------------------------------- (Dollar amounts in thousands, except per Share date) 4/1/98 TO 1998 1997 1996 1995 1994 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 9.21 $ 8.54 $ 8.44 $ 7.85 $ 8.38 $ 8.48 ------- ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS Net investment income .45 .84 .82 .84 .87 .90 Net realized and unrealized gain (loss) on investments (2.00) .67 .12 .59 (.54) (.15) ------- ------- ------- ------- --------- ----- Total from investment operations 7.66 1.51 .94 1.43 .33 (.75) ------- ------- ------- ------- --------- ----- LESS DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income (.42) (.84) (.82) (.84) (.86) (.85) Distributions in excess of net investment income .-- .-- (.02) .-- .-- .-- -------- ---------------- --------- --------- ------- Total dividends and distributions (.42) (.84) (.84) (.84) (.86) (.85) -------- -------- -------- -------- -------- ------- Net asset value, end of year(a) $ 7.24 $ 9.21 $ 8.54 $ 8.44 $ 7.85 $ 8.38 ======== ======== ======= ======= ======= ======= Market price per Share, end of year $ 8.00 $ 9.125 $ 9.00 $ 8.75 $ 8.00 $ 8.37 year(a) ======== ======== ======= ======= ======= ======= TOTAL INVESTMENT RETURN(B) (7.81%) 11.25% 13.38% 20.80% 6.33% 3.90% ======= ===== ===== ===== ===== ======= RATIO/SUPPLEMENTAL DATA: Net assets, end of year $ 82,311 $104,558 $96,042 $94,091 $86,704 $91,698 Average net assets $106,099 $100,766 $95,946 $92,855 $87,734 $96,962 Ratio to average net assets: Expenses, before loan interest, commitment fees and nonrecurring expenses .99%(c) 1.07% 1.08% 1.01% 1.11% 1.12% Total expenses 2.84%(c) 2.44% 2.32% 2.29% 2.71% 2.01% Net investment income 9.65%(c) 9.41% 9.63% 10.18% 10.90% 10.15% Portfolio turnover rate 54% 112% 60% 60% 47% 100% Total debt outstanding at end of $32,000 $30,000 $18,000 $17,000 $19,000 $28,000 year Asset coverage per $1,000 of debt $ 3,744 $ 4,485 $ 6,336 $ 6,535 $ 5,563 $ 4,275 outstanding - -------------------------------------
-7-
Year Ended March 31, ---------------------------------------------- (Dollar amounts in thousands, except per Share data) 4/22/88(d) 1993 1992 1991 1990 TO 3/31/89 ---- ---- ---- ---- ---------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $7.91 $6.80 $7.22 $8.90 $9.30 ----- ----- ----- ----- ----- INCOME FROM INVESTMENT OPERATIONS Net investment income .89 .87 .99 1.12 .93 Net realized and unrealized gain (loss) .52 1.11 (.41) (1.68) (.24) --- ---- ----- ------ ----- on investments Total from investment operations 1.41 1.98 .58 (.56) .69 ---- ---- --- ----- --- LESS DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income (.84) (.87) (.99) (1.12) (.93) Distributions in excess of net investment -- -- (.01) -- (.10) ----- ----- ----- ----- ----- income Total dividends and distributions (.84) (.87) (1.00) (1.12) (1.03) Capital Charge resulting from the issuance of Fund Shares -- -- -- -- (.06) ----- ----- ----- ----- ----- Net asset value, end of year(a) $8.48 $7.91 $6.80 $7.22 $8.90 ===== ===== ===== ===== ===== Market price per Share, end of year(a) $8.875 $7.75 $6.50 $7.00 $ 8.625 ====== ===== ===== ===== ======= 27.02% 34.28% 9.14% (6.51)% (4.24)% ====== ====== ===== ======= ======== TOTAL INVESTMENT RETURN(B) RATIO/SUPPLEMENTAL DATA: Net assets, end of year $92,422 $85,742 $73,656 $78,132 $96,259 Average net assets $88,142 $80,703 $70,661 $88,171 $98,447 Ratio to average net assets: Expenses, before loan interest, commitment fees % % % % % and nonrecurring expenses Total expenses 2.03% 2.26% 2.21% 2.57% 1.44%(c) Net investment income 10.94% 11.69% 15.23% 13.68% 10.89%(c) Portfolio turnover rate 82% 46% 38% 32% 33% Total debt outstanding at end of year $15,000 $15,000 $ 6,000 $ 8,000 $12,000 Asset coverage per $1,000 of debt $ 7,161 $ 6,716 $13,276 $10,767 $ 9,022 outstanding
- ---------------------- (a) Net asset value and market value are published in THE WALL STREET JOURNAL Each Monday. (b) Total investment return is calculated assuming a purchase of common stock at the current market value on the first day and a sale at the current market value on the last day of each year reported. Dividends and distributions are assumed for purposes of this calculation to be reinvested at prices obtained under the dividend reinvestment plan. This calculation does not reflect brokerage commissions. (c) Annualized. (d) Commencement of investment operations. -8- CAPITALIZATION AT SEPTEMBER 30, 1998 TITLE OF CLASS AMOUNT AUTHORIZED Shares of Common Stock, par value 100,000,000 $.01 Amount of outstanding borrowings $32,000,000 INFORMATION REGARDING SENIOR SECURITIES As discussed further below, the Fund has entered into a credit agreement dated as of October 31, 1993 and subsequently amended from time to time ("Credit Agreement") with BankBoston, N.A. ("BankBoston"), formerly known as First National Bank of Boston, pursuant to which BankBoston has agreed to make loans to the Fund from time to time. See "The Fund." The Fund's obligation to BankBoston under the Credit Agreement is considered a senior security under, and therefore is subject to special provisions of, the 1940 Act. See "Description of Credit Agreement." The following table shows certain information regarding the loans payable under the Credit Agreement (and under a predecessor agreement with another bank) as of the end of each fiscal year of the Fund since its inception. AT MARCH 31 TOTAL AMOUNT ASSET COVERAGE OUTSTANDING PER UNIT (1) -------------------- ------------------- ------------------ (In thousands) (In thousands) Loans Payable 1989 $12,000 $ 9,022 1990 8,000 10,767 1991 6,000 13,276 1992 15,000 6,716 1993 15,000 7,161 1994 28,000 4,275 1995 19,000 5,563 1996 17,000 6,535 1997 18,000 6,336 1998 30,000 4,485 At 9/30/98 32,000 3,744 - ---------------- (1) Amount shown is per $1,000 of outstanding loans. Asset coverage per unit is calculated by subtracting the Fund's total liabilities, other than liabilities for outstanding loans, from its total assets and dividing such amount by the quotient of (a) the principal amount of outstanding loans, divided by (b) $1,000. -9- TRADING AND NET ASSET VALUE INFORMATION In the past, the Shares have traded at various times at either a premium or a discount in relation to net asset value. Although the Shares recently have been trading at a premium to net asset value, there can be no assurance that this premium will continue after the Offer or that the Shares will not again trade at a discount. Shares of other closed-end investment companies frequently trade at a discount from net asset value. See "Risk Factors and Special Considerations." The following table shows the high and low sales prices of the Shares on the New York Stock Exchange Composite Tape, quarterly trading volume on the New York Stock Exchange (the "Exchange"), the high and low net asset value per Share, and the quarter-end premium or discount at which the Shares were trading, for each fiscal quarter during the two most recent fiscal years and for the fiscal quarters ended September 30, 1998 and June 30, 1998. QUARTERLY TRADING PREMIUM VOLUME (DISCOUNT) MARKET PRICE (THOUSANDS NET ASSET VALUE TO NET QUARTER ENDED HIGH LOW OF SHARES) HIGH LOW ASSET VALUE June 30, 1996.......... 8 7/8 8-5/8 613 8.50 8.35 3.17 September 30, 1996..... 9 8-1/2 807 8.60 8.30 4.05 December 31, 1996...... 9-1/4 8-7/8 742 8.71 8.58 6.57 March 31, 1997......... 9-3/8 9 950 8.88 8.61 4.53 June 30, 1997.......... 9-3/8 8-3/4 716 8.91 8.49 4.05 September 30, 1997..... 9-7/16 9-1/8 789 9.03 8.85 4.28 December 31, 1997...... 9-11/16 9-1/6 689 9.12 8.83 7.30 March 31, 1998......... 9-15/16 9 1,312 9.22 8.93 (1.39) June 30, 1998.......... 9-1/8 8-7/8 1,109 9.30 8.85 1.69 September 30, 1998..... 9 7-1/2 1,231 8.93 7.17 8.17 The net asset value per Share at the close of business on November __, 1998 (the last trading date on which the Fund publicly reported its net asset value prior to the announcement of the Offer) and on December __, 1998 (the last trading date prior to the date of this Prospectus on which the Fund publicly reported its net asset value) were $____ and $____, respectively, and the last reported sales prices of a Share on the Exchange on those dates were $_____ and $_____, respectively. THE OFFER PURPOSE OF THE OFFER The Board of Directors of the Fund has determined that it is in the best interests of the Fund and its shareholders to increase the number of outstanding Shares and to increase the assets of the Fund available for investment by making the Offer. In reaching its decision, the Board noted that investment opportunities in the lower rated "high yield, high risk" fixed income securities market have broadened on a worldwide basis, and that many more investment -10- opportunities for the Fund exist now than in the recent past. The Board of Directors concluded that an increase in the assets of the Fund would permit the Fund to take advantage of these attractive investment opportunities, consistent with the Fund's investment objectives, while retaining attractive investments in the Fund's portfolio. The Board considered that the Offer may permit the Fund to increase the diversity of its portfolio (thereby potentially lowering overall risk) and may enhance the Fund's ability to buy and sell larger blocks of securities on better terms. In addition, the Board considered that the Offer may improve the Fund's ability to participate in investments on a global basis, as the global high yield markets have significantly expanded over the past five years. The Board of Directors believes that the Offer would permit the Fund to accomplish these objectives while allowing existing shareholders an opportunity to purchase additional Shares at a price below market value without paying a brokerage commission. The Fund utilizes leverage to achieve its investment objectives by borrowing money pursuant to the Credit Agreement when Wellington Management Company, LLP (the "Adviser") believes such leverage is of potential benefit to shareholders. The Fund seeks to enhance returns to shareholders by borrowing at an interest rate lower than the rate the Fund earns on its investments. Leveraging will exaggerate any increases or decreases in the net asset value of Shares and in the yield on the Fund's portfolio. For a discussion of the anticipated impact of the Offer on the Fund's leverage, please refer to "Investment Policies and Limitations" and "Risk Factors and Special Considerations--Risk of Leverage." The Board of Directors believes that increasing the size of the Fund may lower its expenses as a percentage of average net assets because the Fund's fixed costs can be spread over a larger asset base. The Board of Directors also believes that a larger number of outstanding Shares and a larger number of shareholders could increase the level of market interest in the Fund and the liquidity of Shares on the Exchange. The distribution to shareholders of transferable Rights, which themselves may have a realizable value, will also afford nonparticipating shareholders the potential of receiving a cash payment upon sale of such Rights, in partial compensation for the dilution of their interest in the Fund that may result from the Offer. The Board of Directors also considered the impact of the Offer on the Fund's current monthly distributions. Based on the Adviser's assessment of current market conditions in the lower rated debt market and available leverage opportunities, the Board of Directors believes the Offer will not result in a decrease in the Fund's current level of dividends per Share. For a further discussion of the anticipated impact of the Offer on the Fund's dividends and other distributions, please refer to "Risk Factors and Special Considerations--Dividends and Other Distributions." In considering the Offer and its effect on the best interests of the Fund and its shareholders, the Board of Directors retained the Dealer-Manager to provide the Fund with financial advisory, marketing and soliciting services relating to the Offer, including the structure, timing and terms of the Offer. In addition to the foregoing, the Board of Directors considered, among other things, the benefits and drawbacks of conducting a transferable rights offering versus a non-transferable offering, the pricing structure of the Offer, the effect on the Fund if the Offer is undersubscribed and the experience of the Dealer-Manager in conducting rights offerings. Since the fees of the Adviser and Prudential -11- Investments Fund Management LLC (the "Administrator") are based on the Fund's net assets, the Adviser and the Administrator will benefit from an increase in the Fund's assets resulting from the Offer. See "The Adviser" and "The Administrator." The Fund may, in the future and at its discretion, choose to make additional rights offerings from time to time for a number of Shares and on terms which may or may not be similar to this Offer. Any such future rights offering will be made in accordance with the 1940 Act. TERMS OF THE OFFER The Fund is issuing to its Record Date Shareholders Rights entitling the holders thereof to subscribe for an aggregate of ____________ Shares. Record Date Shareholders, where the context requires, shall include beneficial owners whose Shares are held of record by Cede & Co. ("Cede"), nominee for The Depository Trust Company ("DTC"), or by any other depository or nominee. In the case of Shares held of record by Cede or any other depository or nominee, beneficial owners for whom Cede or any other depository or nominee is the holder of record will be deemed to be the holders of the Rights that are issued to Cede or such other depository or nominee on their behalf. Each Record Date Shareholder will receive one Right for each three Shares beneficially owned on the Record Date, and the Rights entitle Record Date Shareholders and holders of Rights acquired during the Subscription Period to acquire one Share for each Right held. No fractional Shares will be issued. In addition, the Rights entitle each Record Date Shareholder to subscribe, pursuant to the Over-Subscription Privilege, for any Shares not acquired by exercise of Rights in the primary subscription. The right to acquire during the Subscription Period at the Subscription Price one Share for every Right held is hereinafter referred to as the "Primary Subscription." The Rights are transferable and persons who become holders of Rights who are not Record Date Shareholders ("Rights Holders") may also purchase Shares in the Primary Subscription and may subscribe, pursuant to the Over-Subscription Privilege, for any shares not acquired by exercise of Rights in the Primary Subscription. All Rights may be exercised until 5:00 p.m., Eastern time, on ___________, 1999 (the "Expiration Date"). (Record Date Shareholders and Rights Holders purchasing Shares in the Primary Subscription and pursuant to the Over-Subscription Privilege (as described below) are hereinafter referred to as "Exercising Rights Holders.") Shares not subscribed for in the Primary Subscription will be offered, by means of the Over-Subscription Privilege, to those Record Date Shareholders and Rights Holders who have exercised all Rights held by them (other than those Rights which cannot be exercised because they represent the right to acquire less than one Share) and who wish to acquire more than the number of Shares they are entitled to purchase pursuant to the exercise of their Rights. Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, as more fully discussed below under "Over-Subscription Privilege." For purposes of determining the maximum number of Shares a shareholder may acquire pursuant to the Offer, beneficial owners of Shares whose Shares are held of record by Cede, as nominee for DTC, or by any other depository or nominee will be deemed to be the holders of the Rights that are issued to Cede or such other depository or nominee on their behalf. -12- There is no minimum number of Rights which must be exercised in order for the Offer to close. The first regular dividend to be paid on Shares acquired upon exercise of Rights will be the first monthly dividend, the record date for which occurs after the issuance of such Shares following the Expiration Date. Except as described below, it is expected that the first dividend to be paid on Shares issued pursuant to the Offer will be paid on or about - -------. Prior to the Expiration Date, the Dealer-Manager may offer Shares acquired through its purchase and exercise of Rights at prices it sets from time to time. To the extent such Shares are issued prior to a dividend record date of the Fund that precedes the Expiration Date, such Shares will receive the dividend declared to the same extent as other Shares outstanding on such dividend record date, and thus the issuance of such Shares may have a dilutive effect on the income per Share available for such dividend. OVER-SUBSCRIPTION PRIVILEGE Shares not subscribed for in the Primary Subscription (the "Excess Shares") will be offered, by means of the Over-Subscription Privilege, to those Exercising Rights Holders who have exercised all exercisable Rights held by them (other than those Rights which cannot be exercised because they represent the right to acquire less than one Share) and who wish to acquire more than the number of Shares for which the Rights held by them are exercisable. Exercising Rights Holders should indicate, on the Subscription Certificate which they submit with respect to the exercise of the Rights held by them, how many Excess Shares they are willing to acquire pursuant to the Over-Subscription Privilege. If sufficient Excess Shares remain, all over-subscription requests by Exercising Rights Holders will be honored in full. If requests for Shares pursuant to the Over-Subscription Privilege exceed the Excess Shares available, the available Excess Shares will be allocated pro rata among Exercising Rights Holders who oversubscribe based on the number of Rights held by such Exercising Rights Holders. Banks, brokers, trustees and other nominee holders of Rights will be required to certify to the Subscription Agent (as defined herein), before any Over-Subscription Privilege may be exercised with respect to any particular beneficial owner, as to the aggregate number of Rights exercised pursuant to the Primary Subscription and the number of Shares subscribed for pursuant to the Over-Subscription Privilege by such beneficial owner and that such beneficial owner's Primary Subscription was exercised in full. Nominee Holder Over-Subscription Forms and Beneficial Owner Certification Forms will be distributed to banks, brokers, trustees and other nominee holders with the Subscription Certificates. The Fund will not offer or sell in connection with the Offer any Shares that are not subscribed for pursuant to the Primary Subscription or the Over-Subscription Privilege. SUBSCRIPTION PRICE The Subscription Price for each Share to be issued pursuant to the Offer will be ____________ as of the close of business on the Expiration Date. -13- Exercising Rights Holders will not know the actual Subscription Price at the time of exercise and will be required initially to pay for the Shares at the Estimated Subscription Price of $______ per Share (based on the Fund's net asset value per Share on ______________). The actual Subscription Price may be more than the Estimated Subscription Price. The Fund announced its intention to make the Offer after the close of trading on the Exchange on November [16], 1998. The net asset values per Share at the close of business on November ___, 1998 (the last trading date on which the Fund publicly reported its net asset value prior to the announcement) and on December ___, 1998 (the last trading date prior to the date of this Prospectus on which the Fund publicly reported its net asset value) were $____ and $____, respectively, and the last reported sales prices of a Share on the Exchange on those dates were $_____ and $______, respectively. EXPIRATION OF THE OFFER The Offer will expire at 5:00 p.m., Eastern time, on January ___, 1999, unless extended by the Fund. The Rights will expire on the Expiration Date and thereafter may not be exercised. The Fund may make one or more extensions of the Offer, as discussed below, up to an aggregate of 45 days from the Expiration Date. Any extension of the Offer will be followed as promptly as practicable by announcement thereof. Such announcement will be issued no later than 9:00 a.m., Eastern time, on the next business day following the previously scheduled Expiration Date. Without limiting the manner in which the Fund may choose to make such announcement, the Fund will not, unless otherwise required by law, have any obligation to publish, advertise or otherwise communicate any such announcement other than by making a release to the Dow Jones News Service or such other means of announcement as the Fund deems appropriate. SUBSCRIPTION AGENT The subscription agent is State Street Bank and Trust Company (the "Subscription Agent"). The Subscription Agent will receive for its administrative, processing, invoicing and other services as subscription agent a fee estimated to be approximately $______, excluding reimbursement for its out-of-pocket expenses related to the Offer. The Subscription Agent is also the Fund's transfer agent, dividend-paying agent and registrar for the Shares. Questions regarding the Subscription Certificates should be directed to Shareholder Communications Corporation at 800-733-8481, ext. 486 (toll free); shareholders may also consult their brokers or nominees. Completed Subscription Certificates must be sent together with proper payment of the Estimated Subscription Price for all Shares subscribed for in the Primary Subscription and the Over-Subscription Privilege to the Subscription Agent by one of the methods described below. Alternatively, Notices of Guaranteed Delivery may be sent by brokerage firms and custodian banks and trust companies exercising Rights on behalf of Exercising Rights Holders whose Shares are held by such institutions by facsimile to (XXX) XXX-XXXX to be received by the Subscription Agent prior to 5:00 p.m., Eastern time, on the Expiration Date. Facsimiles should be confirmed by telephone at (XXX) XXX-XXXX. The Fund will accept only properly completed and executed Subscription Certificates actually received at any of the addresses listed below, prior to 5:00 p.m., Eastern time, on the Expiration Date or by the close -14- of business on the third business day after the Expiration Date following timely receipt of a Notice of Guaranteed Delivery. See "Payment for Shares" below. (1) BY FIRST CLASS MAIL: (2) BY OVERNIGHT COURIER: (3) BY HAND: DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT CONSTITUTE VALID DELIVERY. METHOD FOR EXERCISING RIGHTS Rights are evidenced by Subscription Certificates that, except as described below under "Foreign Shareholders," will be mailed promptly following the Record Date to Record Date Shareholders or, if a shareholder's Shares are held by Cede or any other depository or nominee on their behalf, to Cede or such depository or nominee. Rights may be exercised by completing and signing the Subscription Certificate that accompanies this Prospectus and mailing it in the envelope provided, or otherwise delivering the completed and signed Subscription Certificate to the Subscription Agent, together with payment in full for the Shares to be purchased at the Estimated Subscription Price by the Expiration Date. Rights may also be exercised by contacting your broker, bank or trust company, which can arrange, on your behalf, to guarantee delivery of payment and delivery of a properly completed and executed Subscription Certificate pursuant to a Notice of Guaranteed Delivery by the close of business on January ___, 1999, the third business day after the Expiration Date. A fee may be charged by the broker, bank or trust company for this service. Fractional Shares will not be issued upon the exercise of Rights. Completed Subscription Certificates must be received by the Subscription Agent prior to 5:00 p.m., Eastern time, on the Expiration Date at one of the addresses set forth above (unless the guaranteed delivery procedures are complied with as described below under "Payment for Shares"). Exercising Rights Holders will have no right to rescind their subscriptions after receipt of their payment for Shares by the Subscription Agent. SHAREHOLDERS WHO ARE RECORD OWNERS. Shareholders who are record owners can choose between two options to exercise their Rights, as described below under "Payment for Shares." If time is of the essence, option (2) under "Payment for Shares" below will permit delivery of the Subscription Certificate and payment after the Expiration Date, but such delivery of the Subscription Certificate must be accompanied by a Notice of Guaranteed Delivery from a financial institution meeting certain requirements. SHAREHOLDERS WHOSE SHARES ARE HELD BY A NOMINEE. Shareholders whose Shares are held by a nominee, such as a bank, broker or trustee, must contact that nominee to exercise their Rights. In such case, the nominee will complete the Subscription Certificate on behalf of the shareholder and arrange for proper payment by one of the methods described below under "Payment for Shares." -15- NOMINEES. Nominees who hold Shares for the account of others should notify the beneficial owners of such Shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with the proper payment as described below under "Payment for Shares." INFORMATION AGENT Any questions or requests for assistance concerning the method of subscribing for Shares or for additional copies of this Prospectus or Subscription Certificates or Notices of Guaranteed Delivery may be directed to Shareholder Communications Corporation (the "Information Agent") at its telephone number and address listed below: 17 State Street, 27th Floor New York, New York 10004 Toll Free: (800) 733-8481, ext. 486 Shareholders may also contact their brokers or nominees for information with respect to the Offer. The Information Agent will receive a fee estimated to be $_______, excluding reimbursement for its out-of-pocket expenses related to the Offer. PAYMENT FOR SHARES Shareholders who wish to acquire Shares pursuant to the Offer may choose between the following methods of payment: (1) An Exercising Rights Holder may send the Subscription Certificate together with payment (based on Estimated Subscription Price) for the Shares acquired in the Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege to the Subscription Agent. A subscription will be accepted when payment, together with a properly completed and executed Subscription Certificate, is received by the Subscription Agent's office at one of the addresses set forth above no later than 5:00 p.m., Eastern time, on the Expiration Date. The Subscription Agent will deposit all checks and money orders received by it for the purchase of Shares into a segregated interest-bearing account (the interest from which will accrue to the benefit of the Fund) pending proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO THE HIGH YIELD PLUS FUND, INC. AND MUST ACCOMPANY A PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL COLLECTION OF CHECKS BY 5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT -16- LEAST FIVE BUSINESS DAYS TO CLEAR, SHAREHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. (2) Alternatively, an Exercising Rights Holder may acquire Shares, and a subscription will be accepted by the Subscription Agent if, prior to 5:00 p.m., Eastern time, on the Expiration Date, the Subscription Agent has received a Notice of Guaranteed Delivery by facsimile (telecopy) or otherwise FROM A FINANCIAL INSTITUTION THAT IS A MEMBER OF THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM, THE STOCK EXCHANGE MEDALLION PROGRAM OR THE NEW YORK STOCK EXCHANGE MEDALLION SIGNATURE PROGRAM guaranteeing delivery of (i) payment of the Estimated Subscription Price for the Shares subscribed for in the Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege, and (ii) a properly completed and executed Subscription Certificate. The Subscription Agent will not honor a Notice of Guaranteed Delivery unless a properly completed and executed Subscription Certificate and full payment for the Shares is received by the Subscription Agent by the close of business on January ___, 1999, the third business day after the Expiration Date. On a date within [eight] business days following the Expiration Date (the "Confirmation Date"), the Subscription Agent will send to each Exercising Rights Holder (or, if Shares are held by Cede or any other depository or nominee, to Cede or such other depository or nominee) a confirmation showing (i) the number of Shares purchased pursuant to the Primary Subscription, (ii) the number of Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii) any excess to be refunded by the Fund to such Exercising Rights Holder as a result of payment for Shares pursuant to the Over-Subscription Privilege which the Exercising Rights Holder is not acquiring and (iv) any additional amount payable by such Exercising Rights Holder to the Fund or any excess to be refunded by the Fund to such Exercising Rights Holder, in each case, based on the actual Subscription Price as determined on the Expiration Date. Any additional payment required from Exercising Rights Holders must be received by the Subscription Agent within [seven] business days after the Confirmation Date. Any excess payment to be refunded by the Fund to an Exercising Rights Holder will be mailed by the Subscription Agent as promptly as practicable. All payments by an Exercising Rights Holder must be in U.S. dollars by money order or check drawn on a bank or branch located in the United States and payable to THE HIGH YIELD PLUS FUND, INC. WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION OR OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE BY THE -17- TENTH BUSINESS DAY AFTER THE CONFIRMATION DATE, THE SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING ACTIONS: (i) FIND OTHER EXERCISING RIGHTS HOLDERS TO PURCHASE SUCH SUBSCRIBED AND UNPAID FOR SHARES; (ii) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE, AND/OR (iii) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED SHARES. THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Fund, whose determinations will be final and binding. The Fund in its sole discretion may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Subscription Agent determines in its sole discretion. The Subscription Agent will not be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification. EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE." SALE OF RIGHTS The Rights are transferable until the Expiration Date. The Rights will be listed for trading on the Exchange. The Fund will use its best efforts to ensure that an adequate trading market for the Rights will exist, although no assurance can be given that a market for the Rights will develop. It is anticipated that the -18- Rights will trade on the Exchange on a when-issued basis commencing on or about December ___, 1998 until approximately January ___ 1999 and on a regular way basis thereafter until and including January ___, 1999, the last business day prior to the Expiration Date. SALES THROUGH SUBSCRIPTION AGENT AND DEALER-MANAGER. Record Date Shareholders who do not wish to exercise any or all of their Rights may instruct the Subscription Agent to sell any unexercised Rights through or to the Dealer-Manager. Subscription Certificates representing the Rights to be sold by or to the Dealer-Manager must be received by the Subscription Agent on or before January ___, 1999 (or if the Offer is extended, by two business days prior to the Expiration Date). Upon the timely receipt by the Subscription Agent of appropriate instructions to sell Rights, the Subscription Agent will request the Dealer-Manager either to purchase or to use its best efforts to complete the sale and the Subscription Agent will remit the proceeds of sale, net of commissions, to the selling Record Date Shareholder. Any commissions on sales of Rights will be paid by the selling Record Date Shareholder. If the Rights can be sold, sales of such Rights will be deemed to have been effected at the weighted-average price received by the Dealer-Manager on the day such Rights are sold. The sale price of any Rights sold to the Dealer-Manager will be based upon the then current market price for the Rights, less amounts comparable to the usual and customary brokerage fees. The Dealer-Manager will also attempt to sell all Rights which remain unclaimed as a result of Subscription Certificates being returned by the postal authorities to the Subscription Agent as undeliverable as of the fourth business day prior to the Expiration Date. Such sales will be made net of commissions on behalf of the nonclaiming Record Date Shareholders. The Subscription Agent will hold the proceeds from those sales for the benefit of such nonclaiming Record Date Shareholders until such proceeds are either claimed or escheat. There can be no assurance that the Dealer-Manager will purchase or be able to complete the sale of any such Rights, and neither the Fund nor the Dealer-Manager has guaranteed any minimum sales price for the Rights. OTHER TRANSFERS. The Rights evidenced by a Subscription Certificate may be transferred in whole by endorsing the Subscription Certificate for transfer in accordance with the accompanying instructions. A portion of the Rights evidenced by a single Subscription Certificate (but not fractional Rights) may be transferred by delivering to the Subscription Agent a Subscription Certificate properly endorsed for transfer, with instructions to register such portion of the Rights evidenced thereby in the name of the transferee and to issue a new Subscription Certificate to the transferee evidencing such transferred Rights. In such event, a new Subscription Certificate evidencing the balance of the Rights, if any, will be issued to the Record Date Shareholder or, if the Record Date Shareholder so instructs, to an additional transferee. The signature on the Subscription Certificate must correspond with the name as written upon the face of the Subscription Certificate in every particular, without alteration or enlargement, or any change whatsoever. A signature guarantee must be provided by an eligible financial institution as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), subject to the standards and procedures adopted by the Fund. Record Date Shareholders wishing to transfer all or a portion of their Rights should allow at least five business days for (i) the transfer instructions to be -19- received and processed by the Subscription Agent; (ii) a new Subscription Certificate to be issued and transmitted to the transferee or transferees with respect to transferred Rights, and to the transferor with respect to retained Rights, if any; and (iii) the Rights evidenced by such new Subscription Certificate to be exercised or sold by the recipients thereof. Neither the Fund nor the Subscription Agent nor the Dealer-Manager shall have any liability to a transferee or transferor of Rights if Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date. Except for the fees charged by the Subscription Agent, Information Agent and Dealer-Manager (which will be paid by the Fund), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred or charged in connection with the purchase, sale or exercise of Rights will be for the account of the transferor of the Rights, and none of such commissions, fees or expenses will be paid by the Fund, the Subscription Agent, the Information Agent or the Dealer-Manager. The Fund anticipates that the Rights will be eligible for transfer through, and that the exercise of the Primary Subscription (but not the Over-Subscription Privilege) may be effected through, the facilities of DTC (Rights exercised through DTC are referred to as "DTC Exercised Rights"). Record Date Shareholders of DTC Exercised Rights may exercise the Over-Subscription Privilege in respect of such DTC Exercised Rights by properly executing and delivering to the Subscription Agent, at or prior to 5:00 p.m., Eastern time, on the Expiration Date, a Nominee Holder Over-Subscription Exercise Form or a substantially similar form satisfactory to the Subscription Agent, together with payment of the Subscription Price for the number of Shares for which the Over-Subscription Privilege is to be exercised. DISTRIBUTION ARRANGEMENTS A.G. Edwards & Sons, Inc., which is a St. Louis, Missouri broker-dealer and member of the National Association of Securities Dealers, Inc., will act as the Dealer-Manager for the exercise of the Rights and the Over-Subscription Privilege. Under the terms and subject to the conditions contained in the Dealer-Manager Agreement dated on or about the date hereof (the "Dealer-Manager Agreement"), the Dealer-Manager will provide financial advisory and marketing services in connection with the Offer and will solicit the exercise of Rights and participation in the Over-Subscription Privilege. The Offer is not contingent upon any number of Rights being exercised. The Fund has agreed to pay the Dealer-Manager a fee for its financial advisory, marketing and soliciting services equal to (a) 3.50% of the Subscription Price per Share for Shares issued pursuant to the exercise of the Rights and the Over-Subscription Privilege less (b) a $25,000 retainer fee paid to the Dealer-Manager by the Fund pursuant to a letter agreement between the Fund and the Dealer-Manager. The Dealer-Manager will reallow soliciting fees to broker-dealers who have entered into a Soliciting Dealer Agreement with the Dealer-Manager equal to 2.50% of the Subscription Price per Share for Shares issued pursuant to the exercise of the Rights and the Over-Subscription Privilege. In addition, the Fund may reimburse the Dealer-Manager up to an aggregate of $50,000 for its out-of-pocket costs and expenses incurred in connection with the Offer; provided, however, that if fewer than 1,900,000 Shares are issued upon -20- the exercise of Rights in connection with the Offer, such reimbursement will be limited to a maximum of $25,000. The Fund has agreed to indemnify the Dealer-Manager or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act under certain circumstances. The Dealer-Manager Agreement also provides that the Dealer-Manager will not be subject to any liability to the Fund in rendering the services contemplated by such Agreement except for any act of bad faith, willful misconduct or gross negligence of the Dealer-Manager or reckless disregard by the Dealer-Manager of its obligations and duties under such Agreement. The Fund has agreed not to offer or sell, or enter into any agreement to sell, any Shares, except (a) through the Dealer-Manager or (b) through the Dividend Reinvestment Plan, for a period of six months after the effective date of the Offering. DELIVERY OF SHARE CERTIFICATES Except as described herein, certificates representing Shares acquired in the Primary Subscription and representing Shares acquired pursuant to the Over-Subscription Privilege will be mailed promptly after the expiration of the Offer once full payment for such Shares has been received and cleared. Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will have any Shares acquired in the Primary Subscription and pursuant to the Over-Subscription Privilege credited to their shareholder dividend reinvestment accounts in the Plan. Participants in the Plan wishing to exercise Rights for the Shares held in their accounts in the Plan must exercise such Rights in accordance with the procedures set forth above. Shareholders whose Shares are held of record by Cede or by any other depository or nominee on their behalf or their broker-dealer's behalf will have any Shares acquired in the Primary Subscription credited to the account of Cede or such other depository or nominee. Shares acquired pursuant to the Over-Subscription Privilege will be certificated and certificates representing such Shares will be sent directly to Cede or such other depository or nominee. Stock certificates will not be issued for Shares credited to Plan accounts. FOREIGN SHAREHOLDERS SUBSCRIPTION CERTIFICATES WILL NOT BE MAILED TO RECORD DATE SHAREHOLDERS WHOSE RECORD ADDRESSES ARE OUTSIDE THE UNITED STATES (the term "United States" includes the states, the District of Columbia, and the territories and possessions of the United States) ("Foreign Record Date Shareholders"). Foreign Record Date Shareholders will be sent written notice of the Offer. The Rights to which such Subscription Certificates relate will be held by the Subscription Agent for such Foreign Record Date Shareholders' accounts until instructions are received to exercise or sell the Rights. If no instructions have been received by 5:00 p.m., Eastern time, on January ___, 1999, which is three business days prior to the Expiration Date, the Rights of those Foreign Record Date Shareholders will be transferred by the Subscription Agent to the Dealer-Manager, who will either purchase the Rights or use its best efforts to sell the Rights. The net proceeds, if any, from the sale of those Rights by or to the Dealer-Manager will be remitted to Foreign Record Date Shareholders. -21- FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER The U.S. federal income tax consequences to holders of Shares with respect to the Offer will be as follows: 1. The distribution of Rights to Record Date Shareholders will not result in taxable income to them, nor will they realize taxable income as a result of the exercise of the Rights. No loss will be realized if Rights expire without being exercised. 2. The basis of a Right to a Record Date Shareholder who exercises or sells the Right will be (a) zero, if the Right's fair market value on the distribution date is less than 15% of the fair market value on that date of the Share with regard to which it is issued (unless the holder elects with respect to all Rights received, by filing a statement with his or her timely filed federal income tax return for the year in which the Rights are received, to allocate the basis of the Share between the Right and the Share based on their respective fair market values on that date), or (b) a portion of the basis in the Share based upon those respective fair market values, if the Right's fair market value on that date is 15% or more of the Share's fair market value on that date. The basis of a Right to a Record Date Shareholder who allows the Right to expire will be zero, and the basis to anyone who purchases a Right in the market will be its purchase price. 3. An Exercising Rights Holder's basis for determining gain or loss on the sale of a Share acquired on the exercise of Rights will be equal to the sum of the Record Date Shareholder's basis in the Rights, if any, plus the Subscription Price per Share. An Exercising Rights Holder's gain or loss recognized on the sale or exchange of such a Share will be capital gain or loss if the Share was then held as a capital asset and will be long-term capital gain or loss if the Share was held for more than one year. The Fund is required to withhold and remit to the U.S. Treasury 31% of reportable payments paid on an account if its holder provides the Fund with either an incorrect taxpayer identification number or no number at all or fails to certify that he or she is not subject to such withholding. The foregoing is only a general summary of the material U.S. federal income tax consequences of the Offer under the U.S. Internal Revenue Code of 1986, as amended (the "Code"), and Treasury regulations presently in effect that are generally applicable to (1) Record Date Shareholders that are "United States persons" within the meaning of the Code and (2) any other Record Date Shareholder that would be subject to U.S. federal income tax on the sale or exchange of the Shares acquired on exercise of the Rights, and does not cover foreign, state or local taxes. The Code and those regulations are subject to change by legislative or administrative action, which may be retroactive. Record Date Shareholders and Exercising Rights Holders should consult their tax advisers regarding specific questions as to federal, state, local or foreign taxes. See "Federal Taxation." -22- NOTICE OF NET ASSET VALUE DECLINE The Fund has, as required by the Commission's registration form, undertaken to suspend the Offer until it amends this Prospectus if, subsequent to the effective date of this Registration Statement, the Fund's net asset value declines more than 10% from its net asset value as of that date. In such event, the Expiration Date would be extended up to an aggregate of 45 days from the Expiration Date, and the Fund would notify Exercising Rights Holders of any such decline and thereby permit them to cancel their exercise of Rights. EMPLOYEE PLAN CONSIDERATIONS Shareholders that are tax-deferral arrangements, such as plans qualified under Code section 401(a) (including corporate savings plans, 401(k) plans, and Keogh plans of self-employed individuals), individual retirement accounts under Code section 408(a) ("IRAs"), Roth IRAs under Code section 408A, and custodial accounts under Code section 403(b) (collectively, "Retirement Plans"), should be aware that additional contributions of cash to a Retirement Plan (other than permitted rollover contributions or trustee-to-trustee transfers from another Retirement Plan) in order to exercise Rights, when taken together with contributions previously made, may result in, among other things, excise taxes for excess or nondeductible contributions or the Retirement Plan's loss of its tax-favored status. Furthermore, the sale or transfer of Rights may be treated as a distribution or result in other adverse tax consequences. In the case of Retirement Plans qualified under Code section 401(a) and certain other Retirement Plans, additional cash contributions could cause the maximum contribution limitations of Code section 415 or other qualification rules to be violated. Retirement Plans and other tax-exempt entities, including governmental plans, should also be aware that if they borrow in order to finance their exercise of Rights, they may become subject to the tax on unrelated business taxable income ("UBTI") under Code section 511. If any portion of an IRA or a Roth IRA is used as security for a loan, the portion so used is also treated as distributed to the IRA or Roth IRA owner, which may result in current income taxation and penalty taxes. The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), contains fiduciary responsibility requirements, and ERISA and the Code contain prohibited transaction rules that may apply to the exercise of Rights by Retirement Plans. Retirement Plans that are not subject to ERISA (such as governmental plans) may be subject to state law restrictions that could affect the decision to exercise or transfer Rights. Due to the complexity of these rules and the penalties for noncompliance, shareholders that are Retirement Plans should consult with their counsel and other advisers regarding the consequences of their exercise of Rights under ERISA, the Code, and, where applicable, state law. USE OF PROCEEDS Assuming all Shares offered hereby are sold at the Estimated Subscription Price of $____ per Share, the net proceeds of the Offer are estimated to be $_______ after payment of the Dealer-Manager's fees, the solicitation fees and the -23- estimated offering expenses. These expenses will be borne by the Fund and will reduce the net asset value of the Fund's shares. The Adviser anticipates that investment of substantially all of such net proceeds in accordance with the Fund's investment objectives and policies will take up to sixty days from their receipt by the Fund, depending on market conditions and the availability of appropriate securities for purchase, but in no event is such investment expected to take longer than six months. Pending such investment, the proceeds will be held in high quality short-term money market instruments and U.S. Government securities (which term includes obligations of the U.S. Government, its agencies or instrumentalities). THE FUND The Fund is a diversified, closed-end management investment company registered under the 1940 Act. The Fund's primary investment objective is to provide a high level of current income. A secondary objective is capital appreciation, but only when consistent with its primary objective. An investment in the Fund may not be appropriate for all investors, and no assurance can be given that the Fund's investment objectives will be achieved. Under normal market conditions, at least 65% of the Fund's total assets are invested in high yield debt securities rated in the medium and lower categories by established rating agencies, consisting principally of securities rated BBB to C by Standard & Poor's Rating Group ("S&P") or Baa to C by Moody's Investors Service, Inc. ("Moody's") or non-rated high yield debt securities deemed by the Adviser to be of comparable quality. Securities rated BB or lower by S&P or Ba or lower by Moody's are commonly referred to as "high yield, high risk" securities or "junk bonds." Such securities generally are regarded by the Rating Agencies as significantly more speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and more likely to default than higher quality debt securities. (See Appendix A for a description of Bond Ratings.) The Fund also may invest in high yield debt securities issued by foreign companies, as well as securities issued or guaranteed by foreign governments, quasi-governmental entities, governmental agencies, supranational entities and other governmental entities. No more than 20% of the Fund's total assets will be invested in non-U.S. dollar-denominated foreign debt or equity. However, no restriction exists on the Fund's exposure to U.S. dollar denominated foreign issues. The Fund also may invest in foreign securities issued or guaranteed by companies or governments located in countries whose economies or securities markets are not yet highly developed. Investment in lower rated securities and foreign securities involves special risks. See "Investment Policies and Limitations" and "Risk Factors and Special Considerations." The Fund may invest up to 25% of its total assets in securities that are restricted as to disposition under the federal securities laws or are otherwise not readily marketable, as well as in repurchase agreements maturing in more than seven days. However, no more than 10% of the Fund's total assets will be invested in any one private offering. Securities eligible for resale in accordance with Rule 144A under the Securities Act of 1933, as amended, that have legal or contractual restrictions on resale but are otherwise liquid ("Rule 144A Securities") are not subject to this 25% limitation. The Adviser monitors the liquidity of such restricted securities under the supervision of the Board -24- of Directors. The Fund may invest in securities that are in the lower rating categories or non-rated securities, but only when the Adviser believes that the potential return from such investments remains attractive despite the risks involved. In addition to investing in such lower rated debt securities, the Fund also may invest in equity and other debt securities; hybrid securities having debt and equity characteristics; and certain options and futures contracts. The Fund is a closed-end investment company. Closed-end investment companies differ from open-end investment companies (commonly referred to as "mutual funds") in that closed-end investment companies do not issue securities that are redeemable at a shareholder's option, and they have a relatively fixed capital base, whereas open-end investment companies have a variable capital base since they issue securities that are redeemable at net asset value at any time at the option of the shareholder and typically engage in a continuous offering of their shares. Accordingly, open-end investment companies are subject to periodic asset in-flows and out-flows that can complicate portfolio management. Closed-end investment companies do not face the prospect of having to liquidate portfolio holdings to satisfy redemptions at the option of shareholders or having to maintain cash positions to meet the possibility of such redemptions. The Fund will, however, be required to have sufficient cash or cash equivalents to meet interest payments under the Credit Agreement described below. See "Description of Credit Agreement" and "Description of Shares of Common Stock." The Fund entered into the Credit Agreement with BankBoston, pursuant to which BankBoston has agreed to make loans to the Fund from time to time. From 1989 to 1993 the Fund was a party to a credit agreement with another bank. The maximum amount of BankBoston's current commitment to make loans under the Credit Agreement is $35 million. The Fund pays a commitment fee of 0.09% per annum of the unused portion of the $35 million available under the Credit Agreement to BankBoston. During each of the following fiscal years, the average amount outstanding under the Credit Agreement was as follows: 1998 1997 1996 1995 10/31/93 TO 3/31/94 ---- ---- ---- ---- ------------------- $21,027,397 $17,494,505 $16,095,628 $23,931,319 $20,387,765 The Credit Agreement requires the Fund to comply with certain asset coverage and investment limitations. See "Description of Credit Agreement." The Fund expects to seek to increase the amount it may borrow under the Credit Agreement following completion of the rights offering to the maximum amount then permissible under the 1940 Act, but there can be no assurance that BankBoston will agree to do so. The Fund's use of leverage generally has increased the income yield of the Fund. In order to maintain the same degree of leverage currently utilized by the Fund, the Fund will need to increase the amount of its borrowings under the Credit Agreement after the conclusion of the offering. If the Fund does not maintain the same degree of leverage after the offering, it is possible that the Fund's relative income yield would decrease. The Fund's income level, however, is subject to, but not limited to, the following factors: the yield on available investment opportunities, loss rates on existing issues held in the portfolio, -25- reinvestment of capital gains, and the yield difference between the cost of the borrowings and income on securities purchased for investment as well as the amount of overall borrowings. The Fund was organized as a corporation under the laws of the State of Maryland on April 13, 1988 and commenced operations on April 22, 1988. The Fund's principal office is located at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. The Adviser is registered as an investment adviser with the Commission under the Investment Advisers Act of 1940, as amended. See "The Adviser." INVESTMENT POLICIES AND LIMITATIONS The Fund's investment objectives are fundamental policies and may not be changed without a vote of the holders of a majority of the Fund's outstanding voting securities. As defined by the 1940 Act, a majority of the Fund's outstanding voting securities is the lesser of (a) more than fifty percent of its outstanding voting securities or (b) sixty-seven percent or more of the voting securities present at a meeting at which more than fifty percent of the outstanding voting securities are present or represented by proxy. The other policies of the Fund, unless noted otherwise, are nonfundamental and may be changed by the Board of Directors. There is no assurance that the Fund will achieve its objectives. HIGH YIELD DEBT SECURITIES Securities ratings by Moody's and S&P represent the opinions of those agencies at the time of rating and as such are relative and subjective, and are not absolute, standards of quality. Although the Adviser will consider securities ratings when making investment decisions with respect to high yield debt securities, it will perform its own investment analysis to ensure, to the extent possible, that the planned investment is sound. The Adviser's analysis may include consideration of the issuer's experience and managerial strength, changing financial condition, borrowing requirements or debt maturity schedules and responsiveness to changes in business conditions and interest rates. The Adviser may also consider relative values based on anticipated cash flow, interest or dividend coverage, asset coverage and earnings prospects. Because of the greater number of investment considerations involved in investing in high yield debt securities, the achievement of the Fund's objectives depends more on the Adviser's research abilities than would be the case if it were investing primarily in securities in the higher rating categories. High yield debt securities, including those in which the Fund may invest, are subject to greater risk of loss of principal and interest than higher rated securities, and are especially subject to adverse changes in general economic conditions, the industries in which the issuers are engaged and to changes in the financial condition of the issuers. High yield debt often is subordinated and unsecured. As a result, in the event of default, a holder may be precluded, either by the terms of the instrument or by virtue of its subordinated status, from recovering a portion or all of its investment on a timely basis. In addition, compared with more highly rated instruments, issuers of high yield debt securities typically have a more highly leveraged capital structure than issuers of higher rated securities. The Adviser believes that high yield debt securities, while subject to the risks described above, also offer the potential for attractive returns and intends to invest in those securities that, in the Adviser's opinion, offer meaningful risk-adjusted return potential. The Fund invests in securities issued by a wide range of companies in a number of industries in order to reduce portfolio sensitivity to any one company or -26- industry. There is no guarantee of the success of the Fund's investment approach. Securities issued by foreign issuers may be subject to additional risks. See "Risk Factors and Special Considerations -- Foreign Securities." Changes in market interest rates will affect the value of the Fund's investments and its net asset value since, as with all debt securities, the prices of such investments generally increase when interest rates decline and decrease when interest rates rise. Although many high yield debt securities have been issued with maturities of approximately 7-12 years, the effective maturities of such securities purchased by the Fund may be more or less than that at the time of purchase. Prices of longer-term debt securities generally increase or decrease more sharply than those of shorter-term debt securities in response to interest rate changes. High yield debt securities may also be sensitive to equity market valuations, reflecting the outlook for general corporate health. A significant downturn in equity prices could potentially cause price depreciation in the high yield securities market. High yield debt securities for purposes of Fund policies primarily consist of the following: - -- STRAIGHT FIXED-INCOME DEBT SECURITIES. These include bonds and other debt obligations which bear a fixed or variable rate of interest payable at regular intervals and have a fixed or resettable maturity date. The particular terms of such securities vary and may include features such as call provisions and sinking funds. - -- ZERO-COUPON DEBT SECURITIES. These bear no interest obligation but are issued at a discount from their value at maturity. When held to maturity, their entire return equals the difference between their issue price and their maturity value. - -- ZERO-FIXED COUPON DEBT SECURITIES. These are zero-coupon debt securities that convert on a specified date to interest-bearing debt securities. Prices of non-cash-paying instruments may be more sensitive to changes in the issuer's financial condition, fluctuations in interest rates and market demand/supply imbalances than cash-paying securities with similar credit ratings. In addition, the non-cash interest income earned on such instruments is included in investment company taxable income, thereby increasing the minimum required distributions to shareholders (without providing the corresponding cash flow with which to pay the distributions). See "Taxation." The Adviser will weigh these concerns against the expected total returns for such instruments. The Fund may invest in other high yield debt securities that may be developed in the future, based on the Adviser's determination that such securities have characteristics and ratings consistent with those described above and would further the Fund's investment objectives and policies. -27- - -- RESTRICTED SECURITIES. The Fund may invest up to 25% of its total assets in securities that are restricted as to disposition under the federal securities laws or otherwise not readily marketable, including repurchase agreements maturing in more than seven days. However, no more than 10% of the Fund's total assets will be invested in any one private offering. Securities eligible for resale in accordance with Rule 144A under the Securities Act that have legal or contractual restrictions on resale but are otherwise liquid are not subject to this limitation. The primary risk associated with restricted securities is that the Fund will not be able to dispose of a restricted security at the desired price at the time it wishes to make such disposition. In addition, such securities often sell at a discount from liquid and freely-tradeable securities of the same class or type, although they usually are purchased by the Fund at an equivalent discount which estimates the yield likely to be earned by the Fund during the period such securities are held by the Fund. Such securities may also be more difficult to price accurately. The Adviser monitors the liquidity of such restricted securities under the supervision of the Board of Directors. - -- FOREIGN SECURITIES. The Fund may invest in U.S. and non-U.S. dollar- denominated foreign high yield debt securities issued by foreign companies and issued or guaranteed by foreign governments, quasi-governmental entities, governmental agencies, supranational entities and other governmental entities. No more than 20% of the Fund's total assets will be invested in non-U.S. dollar-denominated foreign debt or equity. No restriction exists on the Fund's exposure to U.S. dollar-denominated foreign issues. OTHER INVESTMENTS OTHER DEBT SECURITIES. The Fund may invest in rated and non-rated debt securities other than the high yield debt securities discussed above. These other securities may include debt securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, and debt securities rated A or higher by Moody's or S&P, or non-rated securities deemed by the Adviser to be of comparable quality. When the Adviser believes the potential return outweighs the risks involved, the Fund also may invest in debt securities rated below C by S&P or C by Moody's (indicating that the security is in default and interest payments and/or principal payments are in arrears) or non-rated securities with similar characteristics; however, does not anticipate investing more than 5% of the Fund's total assets in such securities. See Appendix A for a description of ratings. The Fund also may invest in alternate debt instruments including, but not limited to: - -- Convertible preferred stock and convertible bonds; - -- Bonds accompanied by warrants or options for equity securities; and - -- Payment-in-kind securities, which pay dividends or interest in new securities of the issuer instead of cash. Investments in alternate debt instruments generally will be considered when the Adviser believes that the yield combined with the capital appreciation potential will equal or exceed returns available from straight fixed-income debt securities. -28- EQUITY INVESTMENTS. As described above, the Fund may purchase equity securities, I.E., common or preferred stock. The Fund also may purchase common stock where the issuers are involved in recapitalizations or corporate restructurings, and the Adviser expects the common stock shortly will be exchanged for debt securities directly from the issuer on terms more attractive than subsequently available on the open market. In the event an opportunity to exchange the stock does not materialize as expected, the Fund would seek to dispose of the common stock in an orderly manner. The Fund also may invest in preferred stock (including that of foreign issuers subject to the applicable limits described above in "Foreign Securities") when the Adviser, weighing the security's status in the issuer's credit structure, believes the expected return is attractive relative to alternative investments. Notwithstanding the foregoing, when in the Adviser's opinion market conditions warrant a temporary defensive investment strategy, the Fund may invest without limit in high-quality money market instruments, including commercial paper of domestic and foreign corporations, certificates of deposit, bankers' acceptances and other obligations of banks, repurchase agreements and short-term obligations issued or guaranteed by the U.S. Government, its instrumentalities or agencies. The yield on these securities will tend to be lower than the yield on other securities purchased by the Fund in accordance with its investment objectives. Since the commencement of the Fund's investment operations on April 22, 1988, the Fund has sought to achieve its primary objective of providing a high level of current income to its shareholders. Through its performance during this period, the Fund has demonstrated that investing in high yield, high risk securities on a leveraged basis carries significant risks as well as the possibility of significant rewards through returns. The Fund's annual net asset value returns (including reinvested distributions) for each calendar year since its inception are as follows: 1988 (from April 30, 1988 through December 31, 1988): 6.4%; 1989: -2.4%; 1990: -9.3%; 1991: 42.2%; 1992: 18.4%; 1993: 22.8%; 1994: -5.1%; 1995: 22.5%; 1996: 12.7%; 1997: 13.0%; 1998 (year to date through September 30, 1998: -12.7%. Cumulative net asset value return (including reinvested distributions) for the period beginning on April 30, 1988 through September 30, 1998 was 151.5% (9.3% annualized). Cumulative total market price return for an investment in the Shares for the period beginning on April 30, 1988 and ending on September 30, 1998 was 73.3% (5.4% annualized). Past performance is no guarantee of future results. The credit ratings of all bonds held by the Fund at September 30, 1998 are set forth below. This information reflects the composition of the Fund's assets at September 30, 1998 and is not necessarily representative of the Fund's holdings currently or at any time in the future. -29- RATED BY RATED BY S&P MOODY'S BBB/Baa........................................ 1% 1% BB/Ba.......................................... 23% 20% B/B............................................. 61% 62% CCC/Caa......................................... 7% 9% CC/Ca........................................... 1% 0% Nonrated........................................ 6% 7% --- --- Subtotal.................................. 99% 99% U.S. Governments, equities and others (including 1% 1% cash)..... ---- --- Total..................................... 100% 100% ---- ---- LEVERAGE AND BORROWING From time to time, at the Adviser's discretion, the Fund has obtained investment leverage through bank or other borrowing of up to 33-1/3% of the Fund's total assets (including the amount borrowed), less all liabilities and indebtedness other than the bank or other borrowing. This is equivalent to borrowing up to 50% of the value of the Fund's net assets. Subject to such limitations as may be specified in applicable margin regulations of the Board of Governors of the Federal Reserve System, the Fund may engage in such borrowing currently or in the future by issuing commercial paper or notes or other evidences of indebtedness, secured by pledge or otherwise, although to date it has not done so. The Fund has entered into the Credit Agreement pursuant to which BankBoston has agreed to make loans to the Fund, from time to time, in an aggregate amount not to exceed $35 million. See "Description of Credit Agreement." The Fund intends to seek to increase the amount it may borrow under the Credit Agreement following completion of the rights offering to the maximum amount then permissible under the 1940 Act, but no formal agreement has been entered into by the Fund or BankBoston. The Fund will have asset coverage (as defined in the 1940 Act) of not less than 300% with respect to any borrowings for investment leverage purposes when made. This allows the Fund to borrow for investment leverage purposes an amount equal to as much as 50% of the value of its net assets. The Fund may not, however, repurchase any of its outstanding Shares or pay a dividend unless the Fund will have asset coverage of not less than 300% with respect to such borrowings upon completion of the repurchase or payment of the dividend. In addition to borrowings made as described above, the Fund may also borrow money for temporary or emergency purposes (E.G., clearance of transactions or payment of dividends to shareholders) in an amount not exceeding 5% of the value of the Fund's total assets (not including the amount borrowed). -30- WHEN-ISSUED AND DELAYED DELIVERY SECURITIES From time to time, the Fund may purchase securities on a when-issued or delayed delivery basis, I.E., delivery and payment can take place a month or more after the date of the transaction. The purchase price and the interest rate payable on the securities are fixed on the transaction date. The securities so purchased are subject to market fluctuation, and no interest accrues to the Fund until delivery and payment take place. At the time the Fund makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction and thereafter reflect the value of such securities in determining its net asset value each day. The Fund will make commitments for such when-issued transactions only with the intention of actually acquiring the securities. The Fund's custodian will maintain, in a separate account of the Fund, liquid debt securities from its portfolio, marked to market daily and having an aggregate value equal to or greater than such commitments. On delivery dates for such transactions, the Fund will meet its obligations from maturities for sales of the securities held in the separate account and/or from then available cash flow. If the Fund chose to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of other portfolio obligations, incur a gain or loss due to market fluctuation. LENDING SECURITIES Consistent with applicable regulatory requirements, the Fund may lend up to 30% of its portfolio securities to brokers, dealers, banks or other recognized institutional borrowers of securities, provided that such loans are callable at any time by the Fund and are at all times secured by cash or equivalent collateral that is equal to at least the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the interest and dividends, if any, on the loaned securities, while at the same time earning a fee or interest from the borrower. A loan may be terminated by the borrower on one business day's notice or by the Fund at any time. If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates, and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms that the Adviser and the Board of Directors deem to be creditworthy. On termination of the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan would inure to the Fund. The Fund has not engaged in any loans of portfolio securities since its inception. Since voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loan, in whole or in part as may be appropriate, to permit the exercise of such rights if the matters involved would have a material effect on the Fund's investment in the securities which are the subject of the loan. The Fund will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities and may share the interest earned on collateral with the borrower. -31- REPURCHASE AGREEMENTS The Fund may invest in repurchase agreements involving obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Pursuant to repurchase agreements, the Fund acquires underlying debt securities from a member bank of the Federal Reserve System or a Federal Reserve reporting dealer, subject to the obligation of the seller to repurchase, and the Fund to resell, the securities at an agreed upon price on an agreed upon date usually not more than seven days from the date of purchase. In effect, repurchase agreements are similar to loans extended by the Fund, secured by the underlying securities. The repurchase agreements entered into by the Fund will provide, and the Adviser will monitor the value of the collateral on a continuing basis to ensure, that the underlying collateral securities at all times will have a value at least equal to the resale price stated in the agreement. Under all repurchase agreements entered into by the Fund, the Fund's custodian or its agent must take possession of the underlying collateral. If the seller defaults, the Fund could suffer a loss on the sale of the underlying securities or may suffer a loss of principal and interest if the Fund is treated as an unsecured creditor and is required to return the underlying securities to the seller's estate. The Adviser may enter into repurchase agreements on behalf of the Fund. Such repurchase agreements must conform to certain guidelines and procedures, designed to minimize the risk of loss to the Fund. OPTIONS AND FUTURES STRATEGIES Although it is not the Fund's intention to attempt to achieve its investment objectives through substantial use of these techniques, the Fund may seek to protect against the effect of changes in interest rates or equity market values that are adverse to the present or prospective position of the Fund, and to enhance returns, by employing certain hedging, yield enhancement and risk management techniques. These techniques may include the purchase and sale of options, futures and options on futures on debt or equity securities, aggregates of debt or equity securities or indices of prices thereof, and other financial indices. The Fund's ability to engage in these practices will be limited in accordance with the policies and certain legal considerations set forth below and may further be restricted by tax considerations (see "Taxation"). In addition, the ability of the Fund to engage in these strategies will be limited by a lack of exchange-traded or over-the-counter options and futures on the high yield debt securities in which the Fund will primarily invest. Since its inception, the Fund has only utilized these techniques on an occasional basis. OPTIONS ON SECURITIES. The Fund may purchase call and put options, and write covered call options, on debt and equity securities, aggregates of debt and equity securities or indices of prices thereof, and other financial indices. These may include options traded on U.S. securities exchanges and options traded in U.S. over-the-counter markets. The Fund may purchase call options on equity securities issued by the issuer of portfolio debt securities as a component in the creation of synthetic -32- convertible bonds or synthetic bonds with warrants. The Fund also may purchase call options on debt securities it intends to acquire in order to hedge against (and thereby benefit from) anticipated market appreciation in the price of the underlying securities at limited risk. The Fund may purchase put options on equity securities issued by the issuer of debt securities held by the Fund in order to hedge the Fund's exposure to declines in the value of such debt securities attributable to the credit of the issuer (rather than increasing interest rates). The Fund may also purchase put options on debt securities held by the Fund when the Fund believes that a defensive posture is warranted for all or a portion of its portfolio. The Fund may write call options on portfolio securities as a partial hedge (to the extent of the premium received less transaction costs) against a decline in the value of portfolio securities and in circumstances in which the Adviser anticipates that the price of the underlying securities will not increase above the exercise price of the option by an amount greater than the premium received (less transaction costs) by the Fund. The Fund may write only "covered" options. "Covered" means that so long as the Fund is obligated as the writer of a call option, it will own either the underlying securities, or an option to purchase the same underlying securities having an expiration date not earlier than the expiration date of the "covered" option and an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option a segregated account consisting of cash, or other liquid securities having a value equal to the fluctuating market value of the optioned securities. The Fund may wish to protect certain portfolio securities against a decline in market value at a time when put options on those particular securities are not available for purchase. The Fund may therefore purchase a put option on other carefully selected debt securities, the historical values of which have evidenced a high degree of positive correlation to the historical values of such portfolio securities. If the Adviser's judgment is correct, changes in the value of the put options should substantially offset changes in the value of the portfolio securities being hedged. But the correlation between the two values may not be as close in these transactions as in transactions in which the Fund purchases a put option on an underlying security it owns. If the value of the securities underlying the put options decreases less than the value of the Fund's portfolio securities, the put options may not provide complete protection against a decline in the value of the Fund's portfolio securities below the level sought to be protected by the put option. The Fund may similarly wish to hedge against appreciation in the value of debt securities that it intends to acquire at a time when call options on such securities are not available. The Fund may, therefore, purchase call options on other carefully selected debt securities the historical values of which have evidenced a high degree of positive correlation to the historical values of the debt securities that the Fund intends to acquire. In such circumstances the Fund will be subject to risks analogous to those summarized immediately above in the event that the correlation between the value of call options so purchased and the value of the securities intended to be acquired by the Fund is not as close as anticipated and the value of the securities underlying the call options, increases less than the value of the securities to be acquired by the Fund. -33- The Fund may also purchase put and call options, and write call options on securities indices rather than individual securities in order to hedge the Fund's exposure to systemic market risk (the risk of price fluctuations affecting the market as a whole or a market sector), as opposed to the risk of increases or decreases in the value of a particular security. The use of such options also involves correlation risk analogous to those described in the preceding two paragraphs. The Fund will not purchase an option on a security if, as a result, the value of all outstanding options purchased by the Fund exceeds 5% of the value of the Fund's total assets. The Fund will not write covered call options on portfolio securities representing more than 25% of the value of its total assets. For a further description of certain characteristics of options on securities and associated risks, see Appendix B. FUTURES AND OPTIONS THEREON. The Fund will enter into futures contracts and options thereon only for certain BONA FIDE hedging and risk management purposes. The Fund may purchase and sell various financial futures contracts (including interest rate futures contracts and stock index futures contracts) as well as options thereon. For a description of these instruments, see Appendix B. The Fund may sell interest rate futures contacts when it is expected that interest rates may rise to protect the Fund against a decrease in the value of debt securities which the Fund holds. Similarly, the Fund may purchase interest rate futures contracts when it is expected that interest rates may decline to protect the Fund against increases in the price of debt securities (caused by declining interest rates) which the Fund intends to acquire. To the extent the Fund enters into future contracts for this purpose, it will maintain in a segregated account with the Fund's custodian assets sufficient to cover the Fund's obligations with respect to such futures contracts, in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial margin deposited by the Fund with its custodian with respect to such futures contracts. As discussed above, the Fund intends to invest primarily in a variety of high yield debt securities. Futures contracts on such debt securities are not currently permitted to be traded under applicable law. Accordingly, the Fund may only hedge its exposure to changes in the value of debt securities which it owns or intends to acquire as a result of changes in interest rates by selling or purchasing, as the case may be, futures contracts on government securities and other debt securities which, in the Adviser's judgment, have substantial positive correlation in value to the debt securities which the Fund holds or intends to acquire. There can be no assurance, however, that changes in the value of such futures contracts will exhibit a high degree of positive correlation to the value of such securities. Indeed, many high yield debt securities may trade primarily on the basis of the credit of the issuer and may be relatively interest rate insensitive. Accordingly, the value of such securities may increase or decrease at a greater rate than the futures contracts entered into by the Fund, which may result in losses to the Fund greater than the losses which the Fund would have incurred but for the attempt to so hedge its interest rate risk exposure. -34- Because, as described above, many high yield debt securities trade, like equity securities, on the basis of the credit of the issuer, it is possible that marketwide declines in the value of equity securities will adversely affect the value of the Fund's portfolio securities. In order to hedge the Fund's exposure to such risk in circumstances where the Adviser anticipates general equity market declines, the Fund may sell stock index futures contracts which, in the Adviser's judgment, have a substantial positive correlation in value to portfolio securities of the Fund. In such circumstances, there is the risk that the Adviser's judgment may be incorrect -- resulting in losses to the Fund on its stock index futures positions which may or may not be offset by increases in the value of the Fund's portfolio -- and the additional risk that there is not a substantial positive correlation between the change in value of the Fund's portfolio and the change in the value of the stock indices underlying the Fund's short futures positions. The Fund also may purchase call options on financial futures contracts to hedge against an increase in the price of securities it intends to acquire due to declining interest rates or increasing equity market values. The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying securities, it may or may not be less risky than ownership of the futures contract or underlying securities. The Fund also may purchase put options on financial futures contracts to hedge the Fund's portfolio against the risk of rising interest rates or declining equity market values and consequent reduction in the value of portfolio securities. The purchase of a put option on a futures contract is similar to the purchase of a put option on portfolio securities. The Fund will engage in transactions in financial futures contracts and options thereon only in each case in accordance with the rules and regulations of the Commodity Futures Trading Commission, an agency of the U.S. Government (the "CFTC"), for hedging purposes only and not for speculative purposes. There are no limitations on the Fund's use of futures contracts and options on futures contracts beyond the restrictions set forth above and the economic limitations that are implicit in the use of futures and options on futures within these restrictions. As CFTC regulations and interpretative positions change, the Fund reserves the right to engage in additional transactions and/or commit more of its assets to transactions in futures and options thereon, as permitted thereunder. For a further description of certain characteristics of futures contracts and options thereon and associated risks, see Appendix B. PORTFOLIO TURNOVER Under normal market conditions the Fund anticipates that its portfolio turnover rate will not exceed 100%. However, the Fund may sell portfolio securities without regard to the length of time that they have been held in order to take advantage of new investment opportunities or yield differentials, or because the Fund desires to preserve gains or limit losses due to changing economic conditions or the financial condition of the issuer. A higher rate of turnover -35- may result in increased transaction costs to the Fund. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities purchased or securities sold (excluding securities whose maturities at acquisition were one year or less) by the average monthly value of securities owned during the year. A 100% turnover rate would occur, for example, if all of the securities held in the Fund's portfolio were sold and replaced within one year. Since inception, the Fund's portfolio turnover rate has ranged from 33% to 112%. Turnover may fluctuate due to market activity and levels of new high yield issuance. INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions as fundamental policies. Fundamental policies may not be changed without the approval of a majority of the Fund's outstanding voting securities as defined above. If a percentage restriction on investment or use of assets set forth below is adhered to at the time a transaction is effected, later changes in percentage resulting from changing values of portfolio securities or amount of total assets will not be considered a violation of any of the following restrictions. The Fund may not: (1) Issue senior securities or borrow money except as described above under "Leverage and Borrowing." Collateral arrangements with respect to options, futures contracts and options on futures contracts, and collateral arrangements with respect to initial and variation margin are not considered by the Fund to be the issuance of a senior security. (2) Act as an underwriter except insofar as the Fund may technically be deemed an underwriter under the Securities Act in selling a restricted security. (3) Invest more than 25% of the market or other fair value of its total assets in securities of issuers in any one industry. For this purpose the gas, water, electric and telephone utilities each will be considered separate industries, and "industry" does not include the U.S. Government. (4) As to 75% of its total assets invest more than 5% of the market or other fair value of its total assets in the securities of any one issuer (other than securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities) or purchase more than 10% of the voting securities, or more than 10% of any class of securities, of any one issuer. For purposes of this restriction, all outstanding debt securities of an issuer are considered as one class, and all preferred stocks of an issuer are considered as one class. (5) Purchase or sell real estate or interests in real estate, interests in oil, gas or mineral leases, commodities or commodity futures contracts, except that the Fund may purchase and sell futures contracts, options on futures contracts and securities secured by real estate or interests therein or issued by companies that invest therein. (6) Invest for the purpose of exercising control or management of an issuer. -36- (7) Purchase securities issued by a registered investment company, except when such purchase, though not made in the open market, is part of a plan of merger or consolidation; provided that the Fund may purchase securities issued by investment companies in accordance with applicable limits under the 1940 Act in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, and provided further that the Fund shall not purchase securities issued by any open-end investment company. (8) Sell any security which the Fund does not own unless by virtue of its ownership of other securities it has at the time of sale a right to obtain without payment of further consideration securities equivalent in kind and amount to the securities sold and provided that if such right is conditional, the sale is made upon the same conditions, and further provided that the Fund may engage in options and futures transactions as described above under "Options and Futures Strategies." RISK FACTORS AND SPECIAL CONSIDERATIONS An investment in the Fund is subject to a number of risks and special considerations, including the following: DILUTION You may experience an immediate dilution of the aggregate net asset value of your Shares if you do not fully exercise your Rights pursuant to the Offer. This is because the Subscription Price per Share will likely be less than the Fund's net asset value per Share on the Expiration Date, and the number of Shares outstanding after the Offer is likely to increase in a greater percentage than the increase in the size of the Fund's assets. In addition, if you do not fully exercise your Rights you should expect that you will, at the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. Such dilution could be substantial. For example, assuming that all Rights are exercised at the Estimated Subscription Price of $_______, expenses associated with the Offer were $________, and the Fund's net asset value otherwise remained constant, the Fund's net asset value per Share on such date would be reduced by approximately $_______ per Share. Your ability to transfer your Rights allows you to receive cash for such Rights should you choose not to exercise them. However, it is not certain that a market for the Rights will develop, and no assurance can be given as to the value, if any, that such Rights will have. RISK OF LEVERAGE Generally, the Fund borrows money to purchase securities: (1) When yields on available investments exceed interest rates and other expenses of related borrowing, or (2) When unusual market conditions otherwise make it advantageous for the Fund to increase its investment capacity. -37- Although borrowing by the Fund creates an opportunity for greater total returns, it involves special risks and other considerations. For example: (1) Leveraging will exaggerate any increases or decreases in the net asset value of Shares and in the yield on the Fund's portfolio. (2) While the Fund will have a fixed debt to repay, the investments may decrease or increase in value during the time the borrowing is outstanding. (3) Borrowing will create interest expenses for the Fund which may or may not exceed the income from the securities purchased. (4) If the income from the securities purchased with borrowed funds is not sufficient to cover the cost of borrowing, the net income of the Fund would be less than if borrowing were not used. Therefore, the amount available for distribution to shareholders as dividends would be reduced. (5) The Fund pays a commitment fee of 0.09% per annum of the unused portion of the $35 million available under the Credit Agreement to maintain the line of credit. In an extreme case, if the Fund's current investment income were not sufficient to meet interest payments on loans made under its credit agreement, the Fund could be forced to liquidate certain of its investments at unfavorable prices, thereby potentially reducing the net asset value attributable to the Shares. If the Fund had to sell assets at unfavorable prices in order to maintain compliance with the 1940 Act, the Fund's income or net asset value per Share might be more severely reduced than otherwise. If the issuers of securities held by the Fund default on their payment obligations, and such defaults depress the market value of the Fund's portfolio, the Fund's use of leverage may amplify this reduction in market value. Loans under the Credit Agreement or other forms of leverage may constitute a substantial lien and burden on the Shares by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. Federal securities law generally does not allow the Fund to make distributions to shareholders while any senior security representing indebtedness is outstanding, unless certain requirements are satisfied. It is generally expected that the Fund will not normally be precluded from making such distributions. The following table illustrates the effect of loans made under the Credit Agreement on a shareholder's return, assuming a Fund portfolio of approximately $79.5 million, the annual returns set forth in such table, approximately $31 million of debt outstanding and an annual rate of interest of 6.23% payable on the debt: -38- Assumed Return on Portfolio -10% -5% 0% 5% 10% (Net of Expenses Except Interest).................. Corresponding Return to -12.43% -7.43% -2.43% 2.57% 7.57% Shareholder............. The purpose of the foregoing table is to assist the investor in understanding the effects of leverage. The figures in the table are hypothetical and the actual returns to a holder of the Shares may be greater or less than those appearing in the table. RESTRICTED AND ILLIQUID SECURITIES The Fund may invest a large portion of its assets in certain restricted securities. To the extent that, for a period of time, qualified institutional buyers cease purchasing such restricted securities, the Fund's continued investment in such securities may have the effect of increasing the level of illiquidity in its investment portfolio. DISCOUNT FROM NET ASSET VALUE Shares of closed-end investment companies frequently trade at a market price which is less than the value of the net assets of the funds. In some cases, however, shares of closed-end funds may trade above net asset value. Since the commencement of the Fund's operations, the Shares have traded at various times in the market above, at and below net asset value. In addition, the net asset value of the Fund will change with changes in the value of its portfolio securities. When interest rates decline, the value of the Fund's portfolio can be expected to rise. Conversely, when interest rates rise, the value of a fixed-income portfolio can be expected to decline. FOREIGN SECURITIES Investments in foreign securities involve certain risks, including: (1) Political or economic instability in the country in which the issuer is domiciled; (2) The difficulty of predicting international trade patterns; and (3) The possible imposition of exchange controls. Such risks are heightened because: (1) There may be less publicly available information about a foreign company than about a domestic company. (2) Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic companies. (3) Transactions costs may be higher on foreign securities. (4) There is generally less governmental regulation of securities exchanges, brokers and listed companies abroad than in the United States. -39- (5) With respect to certain foreign countries, there is a possibility of expropriation, nationalization, confiscatory taxation or diplomatic developments which could affect investment in those countries. (6) In the event of a default of any foreign debt obligations, the Fund may not be able to obtain or to enforce a judgment against the issuers of such securities. (7) Interest income from foreign securities issued in local markets may be subject to withholding taxes imposed by governments in those markets. Changes in foreign exchange rates may reduce the U.S. dollar value of the Fund's foreign investments, to the extent that such investments are denominated in foreign currencies. The above risks may be more acute with respect to the Fund's investments in emerging market countries: (1) These countries typically have economic and political systems that are relatively less mature, and often less stable, than those of developed countries. (2) These countries may restrict investment by foreigners. (3) Emerging markets securities may be less liquid, and their prices may be more volatile, because of the possibility of low or no trading volume in these securities. LOWER RATED INVESTMENTS The Fund is designed for long-term investors. Investors should not rely on the Fund for their short-term financial needs. The value of the lower quality securities in which the Fund invests will be affected by: (1) interest rate levels; (2) general economic conditions; (3) specific industry conditions; and (4) the creditworthiness of the individual issuer. The Fund will rely on the Adviser's judgment, analysis and experience in evaluating the creditworthiness of an issuer. In this evaluation, the Adviser will take into consideration, among other things: (1) the issuer's financial resources; (2) the issuer's sensitivity to economic conditions and trends; (3) the issuer's operating history; (4) the quality of the issuer's management; and (5) regulatory matters. Relative to other debt securities, the values of lower rated debt securities may be more volatile because: (1) an economic downturn may more significantly impact their potential for default; or -40- (2) the secondary market for such securities may at times be less liquid or respond more adversely to negative publicity or investor perceptions, making it more difficult to value or dispose of the securities. Lower-rated investments involve certain risks and other considerations. For example: (1) The trading market for lower rated securities is generally less liquid than the market for higher rated securities. (2) In a period of rising interest rates, the inability of issuers of debt obligations to pay such obligations could exacerbate any decline in the Fund's net asset value. (3) If an issuer of a security containing a redemption or call provision exercises either provision in a declining interest rate market, the Fund would be likely to replace the security with a lower-yielding investment. This could result in a decreased return for shareholders. (4) An economic downturn or an increase in interest rates could have a negative effect on the lower rated debt market and on the market value of such securities held by the Fund. (5) The credit ratings issued by credit rating services may not fully reflect the true risks of an investment. The net asset value of the Fund fluctuates as the general levels of interest rates fluctuate. The yields and prices of lower rated securities in which the Fund may invest may tend to fluctuate more than those for higher rated debt securities. ADDITIONAL RISK CONSIDERATIONS The Fund may not achieve its investment objectives. The Fund's non-fundamental investment policies may be changed without shareholder approval. Investment in the Fund should not be considered a complete investment program and may not be appropriate for all investors. Investors should carefully consider their ability to assume these risks before making an investment in the Fund. DIVIDENDS AND OTHER DISTRIBUTIONS: DIVIDEND REINVESTMENT PLAN It is the Fund's current policy, which may be changed by the Board of Directors, to make monthly distributions to shareholders of net investment income and to distribute net realized short- and long-term capital gains and gains from foreign currency transactions at least once each fiscal year. The effective rates of return to investors in the Fund will depend upon several factors, including (a) interest rates, (b) maturities and (c) other terms of securities held by the Fund. -41- Pursuant to the Dividend Reinvestment Plan ("Plan"), shareholders may elect to have all distributions of dividends and gains automatically reinvested by State Street Bank and Trust Company ("Plan Agent") in Shares pursuant to the Plan. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in U.S. dollars mailed directly to the shareholder of record (or if the Shares are held in street or other nominee name, then to the nominee) by State Street Bank and Trust Company as dividend disbursing agent. The Plan Agent serves as agent for the shareholders in administering the Plan. After the Fund declares a dividend or a capital gain distribution, the participants in the Plan receive the equivalent in Shares valued at the lower of market price or net asset value determined as of the time of purchase (generally, the payment date of the dividend or other distribution). Whenever the market price of the Shares on the payment date equals or exceeds their net asset value, participants are issued Shares at the higher of net asset value or 95% of the market price. This discount reflects savings in underwriting and other costs that the Fund otherwise would incur to raise additional capital. The Fund will not issue Shares under the Plan below net asset value. If net asset value exceeds the market price of Shares on the valuation date or if the Fund declares a dividend or other distribution payable only in cash (I.E., if the Board of Directors precludes reinvestment in newly-issued Shares for that purpose), the Plan Agent will, as agent for the participants, receive the cash payment and use it to buy Shares in the open market, on the Exchange or elsewhere, for the participants' accounts. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value per Share, the average per Share purchase price paid by the Plan Agent may exceed the net asset value per Share, resulting in the acquisition of fewer Shares than if the dividend or other distribution had been paid in Shares issued by the Fund. Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent. When a participant withdraws from the Plan or upon termination of the Plan as provided below, certificates for whole Shares credited to the participant's account under the Plan will be issued and a cash payment will be made for any fraction of a Share credited to the account. The Plan Agent maintains each shareholder account in the Plan and furnishes monthly written confirmations of all transactions in the account, including information needed by shareholders for personal and tax records. Shares in the account of each Plan participant are held by the Plan Agent in non-certificated form in the name of the participant, and each shareholder's proxy includes those Shares held pursuant to the Plan. In the case of shareholders, such as banks, brokers or nominees, that hold Shares for others who are the beneficial owners, the Plan Agent administers the Plan on the basis of the number of Shares certified from time to time by the record shareholders as representing the total amount registered in the respective record shareholder's name and held for the account of beneficial owners who participate in the Plan. There is no charge to participants for reinvesting dividends or capital gain distributions, except for certain brokerage commissions, as described below. The Plan Agent's fees for the handling of the reinvestment of dividends and other distributions are paid by the Fund. There are no brokerage commissions charged -42- with respect to Shares issued directly by the Fund. However, each participant pays a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases of Shares under the Plan. The automatic reinvestment of dividends or distributions will not relieve participants of any federal income tax that may be payable thereon. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid subsequent to written notice of the change sent to all shareholders of the Fund at least 90 days before the record date for the distribution. The Plan also may be amended or terminated by the Plan Agent by at least 90 days' written notice to all shareholders of the Fund. All correspondence concerning the Plan should be directed to the Plan Agent at P.O. Box 351, Boston, Massachusetts 02101. MANAGEMENT OF THE FUND BOARD OF DIRECTORS The management of the Fund, including general supervision of the duties performed by the Adviser and the Administrator, is the responsibility of the Board of Directors. The Directors and officers of the Fund, their addresses and their principal occupations for at least the past five years are set forth below. POSITION WITH PRINCIPAL OCCUPATION(S) NAME AND ADDRESS AGE FUND DURING PAST FIVE YEARS Eugene C. Dorsey 71 Director Retired President, Chief Executive Gateway Center Three Officer and Trustee, Gannett 100 Mulberry Street Foundation (now Freedom Forum); Newark, NJ 07102-4077 former Publisher, four Gannett newspapers and Vice President of Gannett Co., Inc.; past Chairman, Independent Sector, Washington, D.C. (largest national coalition of philanthropic organizations). Thomas T. Mooney* 56 President, President, Greater Rochester Metro Gateway Center Three Treasurer Chamber of Commerce; former 100 Mulberry Street and Rochester City Manager. Newark, NJ 07102-4077 Director - -------- * Indicates "interested person" of the Fund as defined in the Investment Company Act of 1940. -43- POSITION WITH PRINCIPAL OCCUPATION(S) NAME AND ADDRESS AGE FUND DURING PAST FIVE YEARS Douglas H. McCorkindale 59 Director Vice Chairman (since March 1984) Gateway Center Three and President (since September 100 Mulberry Street 1997), Gannett Co., Inc. Newark, NJ 07102-4077 Arthur J. Brown 49 Secretary Partner, Kirkpatrick & Lockhart LLP 1800 Massachusetts Ave. NW (law firm). Washington, DC 20036 Stephanie A. Djinis 34 Assistant Partner, Kirkpatrick & Lockhart LLP. 1800 Massachusetts Ave. NW Secretary Washington, DC 20036 DIRECTORS' FEES For the fiscal year ended March 31, 1998, and the calendar year ended December 31, 1997, the Directors received the following compensation for serving as Directors(a): TOTAL COMPENSATION FROM AGGREGATE COMPENSATION FUND COMPLEX FOR THE FROM FUND FOR THE YEAR CALENDAR YEAR ENDED DIRECTOR ENDED MARCH 31, 1998 DECEMBER 31, 1997(b) Eugene C. Dorsey(c) $4,250 $21,000 Thomas T. Mooney $4,250 $21,000 Douglas H. McCorkindale $4,250 $21,000 (a) The Fund does not currently provide pension or retirement plan benefits to the Directors. (b) The Fund Complex is comprised of four investment companies, to which aggregate compensation relates. (c) All compensation from the Fund and Fund Complex for the calendar year ended December 31, 1997 represents deferred compensation. Mr. Dorsey received aggregate compensation for that period from the Fund and the Fund Complex, including accrued interest, in the amounts of approximately $4,389 and $24,287, respectively. OWNERSHIP OF THE FUND At ____________, the officers and Directors of the Fund as a group owned less than 1% of the outstanding Shares. At ___________, DTC, 7 Hanover Square, New York, New York 10004, owned of record _________ Shares representing ______% of outstanding Shares. -44- THE ADVISER The Adviser, with its principal offices at 75 State Street, Boston, Massachusetts 02109, has served as the Fund's investment adviser since the Fund's inception. The Adviser is a Massachusetts limited liability partnership of which Robert W. Doran, Duncan M. McFarland and John R. Ryan are Managing Partners. The Adviser is a registered investment adviser and professional investment counseling firm which provides investment services to investment companies, employee benefit plans, endowment funds, foundations and other institutions and individuals. As of September 30, 1998, the Adviser had investment management authority over approximately $187 billion of assets, including $79 billion of fixed income securities of which approximately $6.6 billion represented "high yield" securities. The Adviser and its predecessor organizations have provided investment advisory services to investment companies since 1933 and to investment counseling clients since 1960. Catherine A. Smith, a Senior Vice President of the Adviser, is primarily responsible for the day-to-day management of the Fund's portfolio. Ms. Smith has served as the Fund's portfolio manager since the Fund's inception. In addition to managing the Fund, Ms. Smith serves as the portfolio manager of several other high yield bond portfolios, including The New America High Income Fund, Inc., a closed-end management investment company. After receiving her Bachelor of Arts degree from Harvard College in 1983, Ms. Smith worked as a securities analyst for Fred Alger Management, Inc. in New York and subsequently joined Wellington Management in 1985. Ms. Smith is a CFA and a member of the Boston Security Analysts Society. Pursuant to an Investment Advisory Agreement dated April 15, 1988, the Adviser manages the investment and reinvestment of the Fund's assets and continuously reviews, supervises and administers the Fund's investment program. The Adviser determines in its discretion the securities to be purchased or sold, subject to the ultimate supervision and direction of the Fund's Board of Directors. The Adviser also has discretion to determine when and to what extent to expand the Fund's investment capacity, by borrowing as described above in the section captioned "Investment Objectives and Policies -- Leverage and Borrowing." As compensation for its services, the Adviser receives from the Fund a monthly fee at an annual rate of 0.50% of the Fund's average weekly net asset value. The Adviser bears all expenses of its employees and overhead incurred in connection with its duties under the Investment Advisory Agreement. The Investment Advisory Agreement was approved by the Fund's shareholders on April 13, 1988. Continuance of the Investment Advisory Agreement most recently was approved by the Fund's Board of Directors, including a majority of the directors who are not parties to the Agreement or "interested persons" of any such party ("independent directors"), on May 12, 1998. It may continue thereafter from year to year if specifically approved at least annually by the Fund's Board of Directors or by a vote of the holders of a majority of the Fund's outstanding voting securities. In either event, the Investment Advisory Agreement must also be approved annually by vote of a majority of the independent directors, cast in person at a meeting called for that purpose. The Investment Advisory Agreement may be terminated by either party at any time without penalty upon 60 days' written notice, and will automatically terminate in the event of its assignment. Termination will not affect the right of the -45- Adviser to receive payments of any unpaid compensation earned prior to termination. The Adviser will not be liable for any error of judgment or for any loss suffered by the Fund in connection with the performance of its obligations under the Investment Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of, or from reckless disregard by it of its obligations and duties under, such Agreement, or damages resulting from a breach of fiduciary duty with respect to receipt of compensation for services. The services of the Adviser to the Fund are not deemed to be exclusive, and nothing in the Investment Advisory Agreement prevents the Adviser, or any affiliate thereof, from providing similar services to other investment companies and other clients (whether or not their investment objectives and policies are similar to those of the Fund) or from engaging in other activities. Subject to policy established by the Board of Directors of the Fund, the Adviser is responsible for arranging for the execution of the Fund's portfolio transactions and the allocation of brokerage transactions. In executing portfolio transactions the Adviser seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved. The Fund may invest in securities traded in the over-the-counter markets and deal directly with the dealers who make markets in the securities involved, unless a better price or execution could be obtained by using a broker. Fixed-income securities are traded principally in the over-the-counter market on a net basis through dealers acting for their own account and not as brokers. The cost of securities purchased from underwriters includes an underwriter's commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer's mark-up or mark-down. While the Adviser generally will seek reasonably competitive commission rates, payment of the lowest commission is not necessarily consistent with best results in particular transactions. In placing orders with brokers and dealers, the Adviser will attempt to obtain the best net price and the most favorable execution for orders; however, the Adviser may, in its discretion, purchase and sell portfolio securities through brokers and dealers who provide the Adviser or the Fund with research, analysis, advice and similar services. The research services provided by broker-dealers may be useful to the Adviser in serving other clients, but they can also be useful in serving the Fund. Not all of such services may be used by the Adviser in connection with the Fund. The Adviser may, in return for research and analysis, pay brokers a higher commission than may be charged by other brokers, provided that the Adviser determines in good faith that such commission is reasonable in terms either of that particular transaction or of the overall responsibility of the Adviser to the Fund and its other clients and that the total commission paid by the Fund will be reasonable in relation to the benefits to the Fund over the long term. Information and research received from such brokers and dealers will be in addition to, and not in lieu of, the services required to be performed by the Adviser under its Investment Advisory Agreement with the Fund, and the advisory fee that the Fund pays to the Adviser will not be reduced as a consequence of the Adviser's receipt of brokerage and research services. -46- The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or of purchasers or sellers of securities; furnishing analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and effecting securities transactions and performing functions incidental thereto such as clearance and settlement. The Adviser's investment management personnel evaluate the quality of research provided by brokers or dealers. The Adviser sometimes uses evaluations resulting from this effort as a consideration in the selection of brokers or dealers to execute portfolio transactions. However, the Adviser is unable to quantify the amounts of commission that might be paid as a result of such research because certain transactions might be effected through brokers which provide research but which would be selected principally because of their execution capabilities. Investment decisions for the Fund and for other investment accounts managed by the Adviser are made independently of each other in the light of differing considerations for the various accounts. However, the same investment decision may occasionally be made for two or more such accounts. In such cases, simultaneous transactions are inevitable. Purchases or sales are then averaged as to price and allocated to accounts according to a formula deemed equitable to each account. While in some cases this practice could have a detrimental effect upon the price or value of the security as far as the Fund is concerned, in other cases it is believed to be beneficial to the Fund. The Fund has no obligation to deal with any broker or group of brokers in the execution of transactions. The Fund contemplates that, consistent with the policy of obtaining the best net results, the Fund may use Prudential Securities Incorporated ("Prudential Securities"), an affiliate of the Administrator, for brokerage transactions. In addition, the Fund has adopted procedures which permit the Adviser to purchase securities for the Fund from underwriting syndicates in which Prudential Securities is a syndicate manager or member, so long as certain conditions are met. THE ADMINISTRATOR The Administrator acts as the administrator of the Fund pursuant to an Administration Agreement with the Fund dated April 15, 1988 ("Administration Agreement"). Under the terms of the Administration Agreement, the Administrator provides meeting facilities for the Board of Directors and shareholders of the Fund and office facilities and personnel to assist the officers of the Fund in the performance of the following services: overseeing the determination and publication of the Fund's net asset value; overseeing maintenance of books and records of the Fund required by Rule 31a-1(b)(4) under the 1940 Act; arranging for bank or other borrowing for the Fund, pursuant to the Adviser's determination of the timing, amount and terms of any such borrowing; preparing the Fund's federal, state and local income tax returns; preparing financial information for the Fund's proxy statements and quarterly and annual reports to shareholders; preparing the Fund's periodic financial reports to the Commission; and coordinating responses to shareholder inquiries relating to the Fund. -47- Under the Administration Agreement, the Fund pays the Administrator a monthly fee at the annual rate of 0.20% of the Fund's average net assets, based on the average weekly net asset value. The Administration Agreement was approved by the Fund's shareholders on April 13, 1988. Continuance of the Administration Agreement was most recently approved by the Fund's Board of Directors, including a majority of the independent directors, on May 12, 1998. It may continue thereafter from year to year if specifically approved at least annually by the Fund's Board of Directors or by a vote of a majority of the Fund's outstanding voting securities. In either event, the Administration Agreement must also be approved annually by vote of a majority of the independent directors, cast in person at a meeting called for that purpose. Because the Adviser's and the Administrator's fees are based on the average weekly net assets of the Fund, the Adviser and the Administrator will benefit from any increase in the Fund's net assets resulting from the Offer. It is not possible to state precisely the amount of additional compensation the Adviser or the Administrator will receive as a result of the Offer because it is not known how many Shares will be subscribed for and because the proceeds of the Offer will be invested in additional portfolio securities which will fluctuate in value. However, based on the estimated proceeds from the Offer assuming all the Rights are exercised in full for the Estimated Subscription Price of $______ per Share, the Adviser would receive additional annual advisory fees of approximately $______, and the Administrator would receive additional annual administration fees of approximately $________, as a result of the increase in average weekly net assets under management over the Fund's current assets under management, assuming no fluctuations in the value of Fund portfolio securities. YEAR 2000 RISKS Like other investment companies and financial and business organizations around the world, the Fund will be adversely affected if the computer systems used by the Adviser and the Fund's other service providers do not properly process and calculate date-related information and data from and after January 1, 2000. This is commonly known as the "Year 2000 Problem." The inability to properly process and calculate date-related information after January 1, 2000 could have a negative impact on handling securities trades, payment of interest and dividends, pricing and account services. The Fund is taking steps that it believes are reasonably designed to address the Year 2000 Problem with respect to the computer systems it uses and to obtain satisfactory assurances that comparable steps are being taken by each of the Fund's major service providers. The Fund does not expect to incur any significant costs in order to address the Year 2000 Problem. However, at this time there can be no assurances that these steps will be sufficient to avoid any adverse impact on the Fund. NET ASSET VALUE The net asset value of Shares is computed weekly on the last day of each week on which the Exchange is open for trading. This determination is made as of the close of the Exchange by deducting the amount of the liabilities of the Fund from the value of its assets and dividing the difference by the number of its -48- Shares outstanding. Fixed-income securities (other than short-term obligations, but including listed issues) may be valued by one or more independent pricing services approved by the Board of Directors that utilize both dealer-supplied valuations and electronic data processing techniques that take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon exchange or over-the-counter prices. Securities (other than fixed-income securities) for which the principal market is one or more securities exchanges will be valued at the last reported sale price prior to the determination (or if there has been no current sale, at the closing bid price) on the primary exchange on which such securities are traded. If a securities exchange is not the principal market for a security such security will be valued, if market quotations are readily available, at the closing bid prices in the over-the-counter market. Portfolio securities for which there are no such valuations, including restricted securities that are not liquid, are valued at fair value as determined in good faith by or at the direction of the Board of Directors. Short-term investments which mature in less than 60 days will be valued at amortized cost. FEDERAL TAXATION The following discussion is based on the advice of Kirkpatrick & Lockhart LLP, Washington, D.C. See "Legal Matters." GENERAL The Fund has elected to be, and qualifies for treatment as, a regulated investment company ("RIC") under Subchapter M of the Code. To qualify, the Fund must, among other things, (a) derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options or futures contracts) derived from its business of investing in securities or those currencies ("Income Requirement"); and (b) diversify its holdings so that, at the end of each quarter of its taxable year, (i) at least 50% of the value of its total assets is represented by cash, U.S. Government securities, securities of other RICs and other securities, with such other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of its assets and that does not represent more than 10% of the issuer's outstanding voting securities and (ii) not more than 25% of the value of its total assets is invested in the securities (other than U.S. Government securities or the securities of other RICs) of any one issuer. For each taxable year that the Fund qualifies as a RIC, it will not be subject to federal income tax on that part of its investment company taxable income (consisting generally of net investment income, net short-term capital gain and net realized gains from certain foreign currency transactions) and net capital gain (the excess of net long-term capital gain over net short-term capital loss) that it distributes to its shareholders, if it distributes at least 90% of its investment company taxable income for that year ("Distribution Requirement"). The Fund intends to distribute substantially all of its investment company taxable income each taxable year. -49- The Fund also currently intends to distribute all realized net capital gain annually. If, however, the Board of Directors determines for any taxable year to retain all or a portion of the Fund's net capital gain, that decision will not affect the Fund's ability to qualify as a RIC but will subject the Fund to a tax of 35% of the amount retained. In that event, the Fund expects to designate the retained amount as undistributed capital gains in a notice to its shareholders, who (i) will be required to include their proportionate shares of the undistributed amount in their gross income as long-term capital gains and (ii) will be entitled to credit their proportionate shares of the 35% tax paid by the Fund against their federal income tax liabilities. For federal income tax purposes, the tax basis of Shares owned by a Fund shareholder will be increased by an amount equal to 65% of the amount of undistributed capital gains included in the shareholder's gross income. The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the extent it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts. The Fund intends to make sufficient distributions to avoid application of the Excise Tax. For this and other purposes, a distribution will be treated as paid by the Fund and received by the shareholders on December 31 of a calendar year if it is declared by the Fund in that month of that year, payable to shareholders of record on a date in that month and paid by the Fund at any time through the end of the following January. Any such distribution thus will be taxable to shareholders in the year the distribution is declared, rather than the year in which the distribution is received. DISTRIBUTIONS Dividends from the Fund's investment company taxable income will be taxable to its shareholders as ordinary income, whether paid in cash or reinvested in Shares. Distributions of the Fund's net capital gain and undistributed capital gains, if any, will be taxable to the shareholders as long-term capital gain, regardless of how long they have held their Shares. Dividends are not expected to be, and capital gain distributions will not be, eligible for the dividends-received deduction allowed to corporations. A participant in the Dividend Reinvestment Plan who receives a distribution that is reinvested in Shares will be treated as having received a taxable distribution and will have a basis for those Shares equal to their fair market value on the distribution date. Shareholders will be notified annually as to the federal income tax status of distributions to them. Investors should be careful to consider the tax implications of buying Shares just prior to a distribution. The price of Shares purchased at that time may reflect the amount of the forthcoming distribution. Those purchasing just prior to the record date for a distribution will receive the distribution, which nevertheless will be taxable to them. SALES OF SHARES On a sale of Shares, a shareholder will realize taxable gain or loss depending upon the amount realized on the sale and the shareholder's basis for the Shares. That gain or loss will be treated as capital gain or loss if the shareholder held the Shares as capital assets and will be long-term capital gain or loss if -50- the Shares were held for more than one year. Any such loss will be disallowed to the extent the Shares that were disposed of are replaced (such as pursuant to the Dividend Reinvestment Plan) within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition. In such a case, the basis of the acquired Shares will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the sale of Shares held for six months or less will be treated as long-term, instead of short-term, capital loss to the extent of any capital gain distributions received by the shareholder on those Shares or any undistributed capital gains designated with respect thereto. ORIGINAL ISSUE DISCOUNT The Fund may purchase debt securities (such as zero-coupon debt securities and zero-fixed-coupon debt securities; see "Investment Policies and Limitations -- High Yield Debt Securities") that have original issue discount, which generally is included in income ratably over the term of the security. The discount that accrues each year on those securities thus will increase the Fund's investment company taxable income, thereby increasing the amount that must be distributed to satisfy the Distribution Requirement, without providing the cash with which to make the distribution. Accordingly, the Fund may have to dispose of other securities, thereby realizing gain or loss at a time when it otherwise might not want to do so, to provide the cash necessary to make distributions to shareholders. ISSUES RELATING TO HEDGING INSTRUMENTS The use of hedging strategies, such as writing (selling) and purchasing options and futures contracts, involves complex rules that will determine for federal income tax purposes the amount, character and timing of recognition of the gains and losses the Fund realizes in connection therewith. Gain from the disposition of foreign currencies (except certain gains that may be excluded by future regulations), and gains from options and futures contracts derived by the Fund with respect to its business of investing in securities or foreign currencies, will be treated as qualifying income under the Income Requirement. Regulated futures contracts and options that are subject to section 1256 of the Code (collectively "Section 1256 contracts") and are held by the Fund at the end of each taxable year will be required to be "marked-to-market" for federal income tax purposes (that is, treated as having been sold at that time at market value). Any unrealized gain or loss required to be recognized and reported for tax purposes under this mark-to-market rule will be added to any realized gains and losses recognized on Section 1256 contracts actually sold by the Fund during the year, and the resulting gain or loss will be treated (without regard to the holding period) as 60% long-term capital gain or loss and 40% short-term capital gain or loss. These rules may operate to increase the amount that must be distributed by the Fund to satisfy the Distribution Requirement, which amount will be taxable to the shareholders as ordinary income, and to increase the net capital gain recognized to the Fund, without in either case increasing the cash available to the Fund. The Fund may elect to exclude certain transactions from the provisions of Section 1256, although doing so may have the effect of increasing the relative proportion of net short-term capital gain (taxable as ordinary income) and/or increasing the amount of dividends that must be distributed to meet the Distribution Requirement and avoid the imposition of the Excise Tax. -51- Generally, the hedging transactions undertaken by the Fund may result in "straddles" for federal income tax purposes. Because application of the straddle rules may affect the character of gains or losses, defer the recognition of losses and/or accelerate the recognition of gains from the affected straddle positions and require the capitalization of interest expense associated therewith, the amount that must be distributed to shareholders (and the character of the distribution as ordinary income or long-term capital gain) may be increased or decreased substantially as compared to a fund that did not engage in such hedging transactions. BACKUP WITHHOLDING The Fund is required to withhold federal income tax at the rate of 31% on all dividends, capital gain distributions and repurchase proceeds payable to any individuals and certain other noncorporate shareholders who fail to provide the Fund with their correct taxpayer identification number or (with respect to dividends and capital gain distributions) who otherwise are subject to backup withholding. FOREIGN WITHHOLDING TAXES Income received by the Fund from sources within foreign countries, and gains realized on foreign securities, may be subject to withholding and other taxes imposed by such countries, which would reduce the Fund's yield and/or total return. Tax conventions between certain countries and the United States may reduce or eliminate such taxes, and many foreign countries do not impose taxes on capital gains from investments by foreign investors. It is impossible to determine the rate of foreign tax in advance, because the amount of the Fund's assets to be invested in various countries is not known. If, as is expected, the Fund does not have more than 50% of its assets invested in the securities of foreign corporations at the close of its taxable year, it will not be entitled to "pass through" to its shareholders the amount of foreign taxes it paid. FOREIGN SHAREHOLDERS U.S. federal income taxation of a shareholder who, as to the United States, is a non-resident alien individual, foreign trust or estate, foreign corporation or foreign partnership depends on whether the income from the Fund is "effectively connected" with a U.S. trade or business carried on by the shareholder. Ordinarily, income from the Fund will not be treated as so "effectively connected." In such case, dividends will be subject to U.S. withholding tax of 30% (or lower treaty rate). Foreign shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in Shares, including the effect of any applicable tax treaties. OTHER TAXATION The foregoing is only a summary of some of the important federal tax considerations affecting the Fund and its shareholders. Distributions also may be subject to state, local and foreign taxes, depending on each shareholder's particular situation. Prospective shareholders thus are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund. -52- DESCRIPTION OF COMMON STOCK GENERAL The Fund has 100,000,000 authorized Shares, par value $0.01. Shares, as issued, are fully paid and nonassessable. All Shares are equal as to dividends, assets and voting privileges and have no pre-emptive, conversion or redemption provisions. Shareholders are entitled to one vote per share and do not have cumulative voting rights. The Shares are listed on the Exchange under the symbol "HYP." DIVIDENDS AND OTHER DISTRIBUTIONS The Fund may not declare dividends or other distributions or purchase or redeem any Shares if, at the time of the declaration, purchase or redemption, as applicable (and after giving effect thereto), asset coverage with respect to the loans made under the Credit Agreement, would be less than 300% (or such higher percentage as may in the future be required by law) or asset coverage with respect to any senior securities of a class which is stock would be less than 200% (or such higher percentage as may in the future be required by law). LIQUIDATION RIGHTS Upon a liquidation, dissolution or winding up of the Fund (whether voluntary or involuntary), the holders of the Shares will be entitled to participate equally in the remaining assets of the Fund. Neither a sale, lease or exchange of all or substantially all of the property and assets of the Fund nor a consolidation or merger of the Fund with or into any other corporation or business trust will be deemed to be a liquidation, dissolution or winding up of the Fund. VOTING Holders of Shares have voting rights of one vote per Share. The Fund is required by the rules of the Exchange to hold annual meetings of shareholders. The most recent annual meeting of shareholders was held on August 27, 1998. The next annual meeting of shareholders is expected to be scheduled for August, 1999. CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS Certain "antitakeover" provisions in its Articles of Incorporation and By-Laws could limit the ability of others to acquire control of the Fund, to cause it to engage in certain transactions or to modify its structure. These provisions will make it more difficult to change management of the Fund than if they had not been included in the Fund's Articles of Incorporation and By-Laws, and could have the effect of depriving shareholders of an opportunity to sell their Shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of the Fund in a tender offer or similar transaction. However, they are designed to encourage persons seeking control of the Fund to -53- negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's management, investment objectives and policies. The Board of Directors is divided into three classes, each having a term of three years: each year the term of one class expires. Directors may be removed from office only for cause and then only by the affirmative vote or consent of the holders of at least 80% of the Shares. In addition, the affirmative vote or consent of the holders of 66 2/3% or more of the Shares is required to authorize the conversion of the Fund from a closed-end to an open-end investment company, or generally to authorize any of the following transactions with a person or entity that is directly or indirectly the beneficial owner of 5% or more of the outstanding Shares; (i) merger or consolidation of the Fund with or into any other corporation; (ii) issuance of any securities of the Fund to any such person or entity for cash; (iii) sale, lease or exchange of all or any substantial part of the assets of the Fund to any such entity or person (except assets having an aggregate fair market value of less than $1,000,000); or (iv) sale, lease or exchange to the Fund, in exchange for securities of the Fund, of any assets of any such entity or person (except assets having an aggregate fair market value of less than $1,000,000). Only a simple majority vote of shareholders is required to approve any of the above transactions, except for conversion of the Fund to an open-end investment company, if a majority of the Board of Directors, including a majority of the disinterested directors, approves the transaction. A "super-majority" vote of the holders of at least 80% of the Shares is required to amend By-Law provisions concerning terms and removal of directors; a "super-majority" vote of the holders of at least 66 2/3% of the Shares is required to amend the Fund's Articles of Incorporation with regard to the rest of the foregoing provisions. The "super-majority" voting provisions with respect to these transactions are more stringent then are required by the 1940 Act or (except with respect to mergers, consolidations or sales, leases or exchanges of all or any substantial part of the assets of the Fund) the Maryland General Corporation Law. The Board of Directors has considered all of these provisions of the Fund's Articles of Incorporation and By-Laws and has determined that such provisions are in the best interests of the Fund's shareholders. DESCRIPTION OF CREDIT AGREEMENT GENERAL The Fund entered into a Credit Agreement dated as of October 31, 1993, and subsequently amended from time to time, with BankBoston, pursuant to which BankBoston has agreed to make loans to the Fund from time to time. The Fund had $32,000,000 in loans outstanding under the Credit Agreement on September 30, 1998, at an average annual interest rate of 6.25%. The Fund's obligation to BankBoston under the Credit Agreement is considered a senior security under the 1940 Act, and the issuance of any subsequent senior securities will be subject to compliance with the 1940 Act, including Section 18 thereof. Any such subsequent senior securities may have certain terms, including, but not limited to, those relating to interest rate, redemptions, repurchases and maturity which differ from the terms of the Credit Agreement. The following summary of certain terms of the Credit Agreement is qualified in its entirety by reference to all provisions of the Credit Agreement, including the definitions therein of certain terms. A copy of the Credit Agreement is filed as an exhibit to the Fund's -54- Registration Statement on Form N-2, of which this Prospectus forms a part. The Fund expects to seek to increase the amount it may borrow under the Credit Agreement following completion of the rights offering to the maximum amount then permissible under the 1940 Act. INTEREST The outstanding principal amount of each loan under the Credit Agreement bears interest until maturity at (i) the greater of (a) the annual rate of interest announced from time to time by BankBoston as its "Base Rate" and (b) the Federal Fund Effective Rate (as defined in the Credit Agreement plus 1/2 of 1% annually, or (ii) the Adjusted Eurodollar Rate (as defined in the Credit Agreement) plus 0.50% annually, or (iii) the applicable Money Market Rate (as defined in the Credit Agreement), as selected by the Fund. COMMITMENT FEE In exchange for BankBoston's commitment to make loans to the Fund from time to time, the Fund pays to BankBoston a Commitment Fee of 0.09% per annum of the unused portion of the $35 million available under the Credit Agreement. PREPAYMENTS Certain of the loans made from time to time under the Credit Agreement may be repaid by the Fund prior to maturity upon the payment of all of the unpaid interest accrued to such date on the amount of the principal of the loan being prepaid. Loans under the Credit Agreement may also be declared immediately due and payable by BankBoston or, in certain circumstances, may become immediately due and payable without such declaration. All prepayments of loans made under the Credit Agreement (except a prepayment in full) will be made in an amount of $100,000 or an integral multiple thereof. RESTRICTIVE COVENANTS Under the 1940 Act and the Credit Agreement, the Fund may not declare dividends or other distributions on the Shares or purchase any Shares if, at the time of the declaration or purchase, as applicable (and after giving effect thereto), asset coverage with respect to the loans made under the Credit Agreement, would be less than 300% (or such higher percentage as may in the future be required by law). Under the Code, the Fund must, among other things, distribute at least 90% of its investment company taxable income each year to maintain its qualification for tax treatment as a RIC. The foregoing limitations on dividends, other distributions and purchases may under certain circumstances impair the Fund's ability to maintain such qualification. See "Federal Taxation." The asset coverage of a class of senior securities representing indebtedness, such as loans under the Credit Agreement, is defined as the ratio of (i) the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities, to (ii) the aggregate amount of senior securities representing indebtedness of the Fund. -55- The Credit Agreement contains a covenant limiting the Fund's ability to create or permit to exist any lien or encumbrance upon any of its property or assets in favor of any person or entity other than BankBoston, other than such liens as are necessary in connection with the Fund's directors' and officers' errors and omission liability insurance policy or liens in connection with authorized futures transactions and collateral arrangements with respect to options and futures contracts or other authorized investments. CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR The Fund's securities and cash are held by State Street Bank and Trust Company, whose principal business address is One Heritage Drive, North Quincy, Massachusetts 02171, as custodian under a custodian contract. State Street Bank and Trust Company serves as dividend disbursing agent, as agent under the Plan and as transfer agent and registrar for the Shares. LEGAL OPINIONS The validity of the Shares offered hereby will be passed on for the Fund by Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036. Certain matters will be passed on for the Dealer-Manager by Rogers & Wells LLP, 200 Park Avenue, New York, New York 10166-0153. REPORTS TO SHAREHOLDERS The Fund will send unaudited semiannual and audited annual reports to its shareholders, including a list of investments held. EXPERTS The financial statements, insofar as they relate to the fiscal years ended March 31, 1998 and 1997, included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The address of PricewaterhouseCoopers LLP is 1177 Avenue of the Americas, New York, New York 10036. The financial statements, insofar as they relate to the remaining periods (other than the period ended September 30, 1998), included in this Prospectus have been so included in reliance on the report of Deloitte & Touche LLP, the Fund's previous independent accountants. FURTHER INFORMATION The Fund has filed with the Commission, Washington, D.C., 20549, a Registration Statement under the Securities Act with respect to the Shares offered hereby. -56- Further information concerning these securities and the Fund may be found in the Registration Statement, of which this Prospectus constitutes a part, on file with the Commission. The Registration Statement may be inspected without charge at the Commission's office in Washington, D.C., and copies of all or any part thereof may be obtained from such office after payment of the fees prescribed by the Commission. The Fund is subject to the informational requirements of the 1934 Act and the 1940 Act, and in accordance therewith files reports and other information with the Commission. Such reports, proxy and information statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, Washington, D.C. 20549 and the Commission's regional offices, including offices at Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports and other information concerning the Fund may also be inspected at the offices of the Exchange. The Commission maintains a Web site (http://www.sec.gov) that contains material incorporated by reference into this Prospectus, and reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. In addition, reports, proxy and information statements and other information concerning the Fund can be inspected at the offices of the Exchange, 20 Broad Street, New York, New York 10005. -57- [Financial Statements and Notes thereto for the period ended September 30, 1998 to be inserted here]. F-1
Portfolio of Investments as of March 31, 1998 THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== MOODY'S PRINCIPAL RATING INTEREST MATURITY AMOUNT VALUE DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS--125.4% CORPORATE BONDS--113.8% - ------------------------------------------------------------------------------------------------------------------------------------ AEROSPACE/DEFENSE--3.6% Argo-Tech Corp., Sr. Sub. Notes B3 8.625% 10/01/07 $1,500 $ 1,533,750 K&F Industries, Inc., Sr. Sub. Notes, Ser. B B3 9.25 10/15/07 750 783,750 Moog, Inc., Sr. Sub. Notes, Ser. B B2 10.00 5/01/06 1,340 1,450,550 ----------- 3,768,050 - ------------------------------------------------------------------------------------------------------------------------------------ AUTOMOTIVE--4.1% Accuride Corp., Sr. Sub. Notes B2 9.25 2/01/08 450 447,750 Federal-Mogul Corp., Sr. Notes Ba2 8.80 4/15/07 500 524,770 Johnstown America Industries, Inc., Sr. B3 11.75 8/15/05 1,500 1,676,250 Sub. Notes Key Plastics, Inc., Sr. Sub. Notes, Ser. B B3 10.25 3/15/07 750 796,875 LDM Technologies, Inc., Sr. Sub. Notes, Ser. B B3 10.75 1/15/07 750 817,500 ---------- 4,263,145 - ------------------------------------------------------------------------------------------------------------------------------------ BASIC INDUSTRIES-MANUFACTURING--6.3% Clark-Schwebel Inc., Sr. Notes, Ser. B B2 10.50 4/15/06 465 520,800 Gaylord Container Corp., Sr. Notes B3 9.375 6/15/07 1,000 1,000,000 Great Lakes Carbon Corp., Sr. Sec. Notes Ba3 10.00 1/01/06 1,000 1,095,000 International Wire Group, Inc., Sr. Sub. Notes B3 11.75 6/01/05 750 832,500 Neenah Corp., Sr. Sub. Notes, Ser. B B3 11.125 5/01/07 750 830,625 Roller Bearing Co. Amer. Inc., Sr. Sub. Notes, B3 9.625 6/15/07 750 770,625 Ser. B Thermadyne Holdings Corp., Sr. Notes B1 10.25 5/01/02 750 780,000 UNICCO Service Co./UNICCO Fin. Corp., B3 9.875 10/15/07 750 768,750 Sr. Sub. Notes, Ser. B ---------- 6,598,300 - ------------------------------------------------------------------------------------------------------------------------------------ BUILDING & RELATED INDUSTRIES--0.8% Amtrol Inc., Sr. Sub. Notes B3 10.625 12/31/06 500 518,750 Nortek Inc., Sr. Notes, Ser. B B1 9.25 3/15/07 350 364,000 --------- 882,750 - ------------------------------------------------------------------------------------------------------------------------------------ CABLE--5.2% Adelphia Communications Corp., Sr. Notes, B3 9.875 3/01/07 500 545,000 Ser. B Century Communications Corp., Sr. Disc. Notes Ba3 Zero 1/15/08 1,250 550,000 CSC Holdings, Inc., Sr. Deb., Ser. B Ba2 8.125% 8/15/09 250 261,875 Diamond Cable Co., Sr. Disc. Notes, Zero B3 10.75 2/15/07 1,000+ 707,500 Coupon (until 2/15/02) (United Kingdom) Diamond Holdings, PLC, Sr. Notes B3 9.125 2/01/08 240+ 246,600 (United Kingdom) Falcon Holding Group L.P., Sr. Deb. B2 8.375 4/15/10 845 842,735 Frontiervision Holdings L.P., Sr. Disc. Notes, B## 11.875 9/15/07 1,500 1,166,250 Zero Coupon (until 9/15/01) Rifkin Acquisition Partners L.L.L.P., Sr. Sub. B3 11.125 1/15/06 1,000 1,110,000 Notes ----------- 5,429,960 F-2 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio of Investments as of March 31, 1998 THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== MOODY'S PRINCIPAL RATING INTEREST MATURITY AMOUNT VALUE DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------------------ CHEMICALS--4.5% Acetex Corp., Sr. Sec. Notes (Canada) B1 9.75% 10/01/03 $ 750+ 776,250 Huntsman Corp., Sr. Sub. Notes, F.R.N. B2 9.125 7/01/07 250 250,000 Laroche Industries, Inc., Sr. Sub. Notes B3 9.50 9/15/07 1,000 987,500 PCI Chemicals Canada, Inc., Sr. Sec. Notes, B2 9.25 10/15/07 250+ 252,500 Ser. B (Canada) Pioneer Americas Acquisition Corp., Sr. Sec. B2 9.25 6/15/07 500 515,000 Notes, Ser. B Sovereign Specialty Chemicals, Sr. Sub. Notes B3 9.50 8/01/07 1,000 1,055,000 Terra Industries, Inc., Sr. Notes Ba3 10.50 6/15/05 250 275,000 Texas Petrochemicals Corp., Sr. Sub. Notes B3 11.125 7/01/06 500 551,250 ---------- 4,662,500 - ------------------------------------------------------------------------------------------------------------------------------------ CONSUMER GOODS & SERVICES--1.5% Chattem Inc., Sr. Sub. Notes B2 8.875 4/01/08 425 430,313 Muzak L.P., Muzak Capital, Sr. Notes Ba3 10.00 10/01/03 500 522,500 Revlon Worldwide, Sr. Sec. Disc. Notes, B3 Zero 3/15/01 750 573,750 --------- Ser. B 1,526,563 - ------------------------------------------------------------------------------------------------------------------------------------ CONTAINERS--3.3% Bway Corp., Sr. Sub. Notes, Ser. B B2 10.25 4/15/07 750 825,000 Calmar Inc., Sr. Sub. Notes, Ser. B B3 11.50 8/15/05 500 531,250 Silgan Holdings Inc. Sr. Sub. Deb. B1 9.00 6/01/09 1,750 1,837,500 Sub. Deb., PIK NR 13.25 7/15/06 200 226,289 ---------- 3,420,039 - ------------------------------------------------------------------------------------------------------------------------------------ ENERGY & RELATED GOODS & SERVICES--11.0% Abraxas Petroleum Corp., Sr. Notes, Ser. B B2 11.50 11/01/04 1,500 1,545,000 Costilla Energy Inc., Sr. Notes B2 10.25 10/01/06 875 888,125 Sr. Sub. Notes B2 10.25 10/01/06 375 380,625 Cross Timbers Oil Co., Sr. Sub. Notes, Ser. B B2 9.25 4/01/07 1,250 1,296,875 Kelley Oil And Gas Corp., Sr. Sub. Notes, B3 10.375 10/15/06 500 517,500 Ser. B Petroleos Mexicanos, Global Gtd. Notes Ba2 8.85 9/15/07 1,500+ 1,511,250 (Mexico) Plains Resources, Inc., Sr. Sub. Notes B2 10.25 3/15/06 1,500 1,612,500 Pride Petroleum Services, Inc., Sr. Notes Ba3 9.375 5/01/07 315 337,050 RAM Energy, Inc., Sr. Notes B3 11.50 2/15/08 1,750 1,741,250 Tatneft Finance, Gtd. Bonds (Russia) Ba3 9.00 10/29/02 750+ 682,500 Transportadora de Gas del Sur, S.A., Notes Ba3 10.25 4/25/01 250+ 260,937 (Argentina) Wainoco Oil Corp., Sr. Notes B1 9.125 2/15/06 750 753,750 ----------- 11,527,362 F-3 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio of Investments as of March 31, 1998 THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== MOODY'S PRINCIPAL RATING INTEREST MATURITY AMOUNT VALUE DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL SERVICES--13.1% Bangkok Bank Public Co., Deb. (Thailand) Ba1 7.25% 9/15/05 $ 1,000+ $ 878,300 Chevy Chase Svgs. Bank, F.S.B., Sub. Deb. B1 9.25 12/01/08 500 522,500 Emergent Group Inc., Sr. Notes, Ser. B B3 10.75 9/15/04 1,000 942,500 First Nationwide Holdings, Inc., Sr. Notes B3 12.50 4/15/03 750 855,000 FirstFed Financial Corp., Notes B2 11.75 10/01/04 500 540,000 Guangdong Enterprises Hldgs., Ltd. (China), Sr. Notes Baa3 8.875 5/22/07 250+ 224,182 Sr. Notes Baa3 8.875 5/22/07 900+ 806,625 Hawthorne Financial Corp., Notes NR 12.50 12/31/04 1,250 1,284,375 Olympic Financial Ltd., Sr. Notes B2 11.50 11/01/04 1,500@ 1,477,500 Resource America, Inc., Sr. Notes Caa 12.00 8/01/04 1,500 1,593,750 Southern Pacific Funding Corp., Sr. Notes B3 11.50 11/01/04 350 346,500 Superior Nat'l. Cap. Trust I B1 10.75 12/1/17 1,135 1,205,938 Thai Farmers Bank Ltd., Sub. Notes Ba1 8.25 8/21/16 1,500+ 1,288,650 (Thailand) Unibanco-Uniao de Bancos Brasileiros S.A., B1 8.00 3/06/00 250+ 245,000 Unsub. Notes (Brazil) Western Financial Svgs. Bank, F.S.B., B1 8.875 8/01/07 1,500 1,440,000 ----------- Sub. Cap. Deb. 13,650,820 - ------------------------------------------------------------------------------------------------------------------------------------ FOOD & LODGING--3.9% Aurora Foods Inc., Sr. Sub. Notes, Ser. D B3 9.875 2/15/07 230 247,250 Capstar Hotel Co., Sr. Sub. Notes B1 8.75 8/15/07 500 517,500 Del Monte Foods Co., Sr. Disc. Notes, Zero Caa 12.50 12/15/07 1,400 924,000 Coupon (until 12/15/02) Eagle Family Foods Inc., Sr. Sub. Notes B3 8.75 1/15/08 350 350,000 John Q. Hammons Hotels, First Mtge. Bonds B1 8.875 2/15/04 2,070 2,095,875 ---------- 4,134,625 - ------------------------------------------------------------------------------------------------------------------------------------ GAMING--3.5% Argosy Gaming Co., First Mtge. Notes B2 13.25 6/01/04 500 557,500 Fitzgeralds Gaming Corp., Sr. Sec. Notes B3 12.25 12/15/04 1,000 1,020,000 Hollywood Casino Corp., Sr. Sec. Notes B2 12.75 11/01/03 1,000 1,105,000 Lady Luck Gaming Corp., First Mtge. Notes B2 11.875 3/01/01 1,000 1,030,000 ----------- 3,712,500 - ------------------------------------------------------------------------------------------------------------------------------------ GROCERY STORES--1.6% Homeland Stores, Inc., Sr. Sub. Notes NR 10.00 8/01/03 1,000 940,000 Pathmark Stores, Inc., Sub. Notes Caa 11.625 6/15/02 750 744,375 ---------- 1,684,375 - ------------------------------------------------------------------------------------------------------------------------------------ HEALTH CARE--4.3% Columbia/HCA Healthcare Corp., Notes Ba2 7.25 5/20/08 1,000 947,280 Owens & Minor Inc., Sr. Sub. Notes B1 10.875 6/01/06 1,000 1,117,000 Pharmerica Inc., Sr. Sub. Notes B2 8.375 4/01/08 625 628,125 Universal Hospital Svcs., Sr. Notes B3 10.25 3/01/08 1,750 1,798,125 ----------- 4,490,530 F-4 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio of Investments as of March 31, 1998 THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== MOODY'S PRINCIPAL RATING INTEREST MATURITY AMOUNT VALUE DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------------------ HOME BUILDER & REAL ESTATE--2.9% BF Saul Real Estate Investment Trust, B3## 9.75% 4/01/08 $ 500 $ 503,750 Sr. Sec. Notes Kaufman & Broad Home Corp., Sr. Sub. Notes Ba3 9.625 11/15/06 500 532,500 Presley Companies, Sr. Notes B3 12.50 7/01/01 1,000 960,000 Standard Pacific Corp., Sr. Notes Ba2 8.50 6/15/07 750 765,000 Toll Corp., Sr. Sub. Notes Ba3 7.75 9/15/07 250 250,625 ---------- 3,011,875 - ------------------------------------------------------------------------------------------------------------------------------------ MEDIA & COMMUNICATIONS--9.5% Allbritton Communications Co., Sr. Sub. Notes B3 8.875 2/01/08 350 353,500 Big Flower Press Holdings Inc., Sr. Sub. Notes B2 8.875 7/01/07 500 510,000 Chancellor Media Corp., Sr. Sub. Notes B2 9.375 10/01/04 500 530,000 Echostar DBS Corp., Sr. Sec. Notes Caa 12.50 7/01/02 900 1,019,250 Fox/Liberty Networks L.L.C., Sr. Disc. Notes, B1 9.75 8/15/07 1,500 1,020,000 Zero Coupon (until 8/15/02) Globo Comunicacoes e Participacoes S.A., B1 10.50 12/20/06 1,250+ 1,270,312 Notes (Brazil) Innova S de R.L., Sr. Notes (Mexico) B2 12.875 4/01/07 1,000+ 1,067,500 Jacor Communications, Inc. Sr. Sub. Notes B2 9.75 12/15/06 250 273,750 Sr. Sub. Notes B2 8.00 2/15/10 270 271,688 JCAC, Inc., Sr. Sub. Notes B2 10.125 6/15/06 250 274,375 Liberty Group Publishing Inc., Sr. Disc. Notes, Caa 11.625 2/01/09 415 254,188 Zero Coupon (until 2/1/03) Net Sat Servicos Ltda., Sr. Sec. Notes (Brazil) B2 12.75 8/05/04 285+ 292,125 Sullivan Graphics Inc., Sr. Sub. Notes Caa 12.75 8/01/05 1,000 1,057,500 Tevecap S.A., Sr. Notes (Brazil) B2 12.625 11/26/04 1,250+ 1,265,625 TV Azteca S.A. de CV, Gtd. Sr. Notes (Brazil) Ba3 10.50 2/15/07 500+ 532,500 ----------- 9,992,313 - ------------------------------------------------------------------------------------------------------------------------------------ METALS--4.8% Acindar Industria Argentina de Aceros S.A., B2 11.25 2/15/04 750+ 795,000 Notes (Argentina) AK Steel Corp., Sr. Notes Ba2 9.125 12/15/06 500 535,625 Armco, Inc., Sr. Notes B2 9.00 9/15/07 250 260,625 Companhia Vale do Rio Doce, Notes (Brazil) NR 10.00 4/02/04 750+ 768,750 CSN Iron S.A., Gtd. Notes (Brazil) B1 9.125 6/01/07 1,250+ 1,170,313 GS Technologies Operating Co., Inc., Sr. Notes B2 12.25 10/01/05 350 393,750 Weirton Steel Corp., Sr. Notes B2 11.375 7/01/04 1,000 1,082,500 ----------- 5,006,563 - ------------------------------------------------------------------------------------------------------------------------------------ PAPER & PACKAGING--11.1% APP Int'l. Finance Co., Sec. Notes (Indonesia) Caa 11.75 10/01/05 750+ 720,000 Aracruz Celulose S.A., (Brazil), Notes B1 10.375 1/31/02 1,035+ 1,068,637 Notes B1 10.375 1/31/02 715+ 738,238 Bahia Sul Celulose S.A., Notes (Brazil) NR 10.625 7/10/04 500+ 497,500 Container Corp. of America, Sr. Notes B1 9.75 4/01/03 1,000 1,075,000 Sr. Notes, Ser. B B1 10.75 5/01/02 1,000 1,100,000 Doman Industries Ltd., Sr. Notes (Canada) B1 8.75 3/15/04 750+ 747,187 Fonda Group Inc., Sr. Sub. Notes, Ser. B B3 9.50 3/01/07 750 735,000 F-5 - ------------------------------------------------------------------------------------------------------------------------------------ Grupo Industrial Durango, S.A. de C.V., Notes B1 12.625% 8/01/03 $ 350 $ 397,688 Klabin Fabricadora de Papel e Celulose S.A., NR 11.00 8/12/04 1,000+ 1,006,250 Gtd. Notes (Brazil) Pindo Deli Finance Mauritius Ltd., Gtd. Sr. Caa 10.75 10/01/07 1,250+ 1,012,500 Notes (Indonesia) Repap New Brunswick, Inc., Sr. Sec. Notes Caa 10.625 4/15/05 1,500+ 1,515,000 (Canada) S.D. Warren Co., Sr. Sub. Notes, Ser. B B1 12.00 12/15/04 350 390,250 Tembec Finance Corp., Sr. Notes (Canada) B1 9.875 9/30/05 500+ 530,000 ----------- 11,533,250 - ------------------------------------------------------------------------------------------------------------------------------------ TECHNOLOGY Advanced Micro Devices, Inc., Sr. Sec. Notes Ba1 11.00 8/01/03 750 804,375 Concentric Network Corp., Notes NR 12.75 12/15/07 255@ 300,900 DecisionOne Corp., Sr. Sub. Notes B3 9.75 8/01/07 500 487,500 DecisionOne Holdings Corp., Sr. Disc. Deb., Caa 11.50 8/01/08 1,000@ 600,000 Zero Coupon (until 8/1/02) Fairchild Semiconductor Corp., Sr. Sub. Notes B2 10.125 3/15/07 500 522,500 Pierce Leahy Corp., Sr. Sub. Notes B3 9.125 7/15/07 500 525,000 Unisys Corp., Sr. Notes, Ser. B B1 12.00 4/15/03 500 565,000 Verio Inc., Sr. Notes NR 10.375 4/01/05 960 998,400 ----------- 4,803,675 - ------------------------------------------------------------------------------------------------------------------------------------ TELECOMMUNICATIONS--12.6% Advanced Radio Telecom Corp., Sr. Notes Caa## 14.00 2/15/07 850 935,000 American Communications Services, Sr. Disc. NR 12.75 4/01/06 750 596,250 Notes, Zero Coupon (until 4/1/01) American Mobile Satellite Corp., Notes NR 12.25 4/01/08 280@ 290,500 BTI Telecom Corp., Sr. Notes B2 10.50 9/15/07 890 927,825 Clearnet Communications, Inc., Sr. Disc. Notes, B3 14.75 12/15/05 750+ 620,625 Zero Coupon (until 12/15/00) (Canada) GST Telecommunications, Inc., Sr. Sub. Notes, NR 12.75 11/15/07 635 768,350 Zero Coupon (until 11/15/02) Hyperion Telecommunications Inc., Sr. Disc. Notes, Zero Coupon (until 4/15/01) B3 13.00 4/15/03 350 269,500 Sr. Sec. Notes, Ser. B B3 12.25 9/01/04 715 807,950 Intermedia Communications Inc., Sr. Notes B2 8.50 1/15/08 150 157,125 Sr. Notes, Ser. B B2 8.875 11/01/07 350 371,875 Iridium L.L.C./Iridium Capital Corp., Sr. B3 11.25 7/15/05 1,000 1,061,250 Notes, Ser. C ITC Deltacom Inc., Sr. Notes B2 8.875 3/01/08 700 710,500 Korea Telecom (South Korea), Notes Ba1 7.50 6/01/06 500+ 438,675 Notes Ba1 7.625 4/15/07 1,000+ 878,690 McLeodUSA Inc., Sr. Notes B2 9.25 7/15/07 500 535,000 Sr. Notes B2 8.375 3/15/08 140 145,250 MGC Communications Inc., Sr. Sec. Notes, Caa 13.00 10/01/04 500 517,500 Ser. B MobileMedia Communications, Inc., Sr. C 9.375 11/01/07 2,000** 230,000 Sub. Notes F-6 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio of Investments as of March 31, 1998 THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== MOODY'S PRINCIPAL RATING INTEREST MATURITY AMOUNT VALUE DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------------------ Philippine Long Dist. Tel. Co., Notes Ba2 7.85% 3/06/07 1,750+ 1,631,875 (The Philippines) Winstar Communications, Inc., Sr. Disc. Notes, NR 14.00 10/15/05 1,500 1,260,000 Zero Coupon (until 10/15/00) ------------ 13,153,740 - ------------------------------------------------------------------------------------------------------------------------------------ TEXTILES--0.2% Polysindo Int'l. Finance Co., Notes Caa 11.375 6/15/06 350+ 234,500 (Indonesia) - ------------------------------------------------------------------------------------------------------------------------------------ TRANSPORTATION--0.9% MRS Logistica S.A., Notes (Brazil) B1## 10.625 8/15/05 500+ 490,000 Valujet Inc., Sr. Notes B3 10.25 4/15/01 500 475,000 ---------- 965,000 - ------------------------------------------------------------------------------------------------------------------------------------ UTILITIES--0.5% Inversora Electrica de Buenos Aires S.A., Sr. Ba1## 9.00 9/16/04 500+ Notes, Ser. B (Argentina) 496,250 ----------- Total corporate bonds (cost $116,837,701) 118,948,685 - ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT OBLIGATIONS+--7.2% Republic of Argentina, Global Bonds Ba3 11.00 10/09/06 1,750 1,946,875 Global Bonds Ba3 8.375 12/20/03 500 497,500 Global Bonds Ba3 11.375 1/30/17 500 565,625 Republic of Brazil, Ser. C B1 4.50 4/15/14 2,317 1,949,477 Republic of Columbia, Global Bonds Baa3 8.375 2/15/27 1,750 1,620,605 Republic of Venezuela, Bonds Ba2 9.25 9/15/27 1,000 907,500 ----------- Total foreign government obligations 7,487,582 (cost $6,786,157) - ------------------------------------------------------------------------------------------------------------------------------------ PREFERRED STOCKS--4.4% Chevy Chase Capital Corp., Noncumulative B1 10.375% -- 10,000 $ 536,250 Exchangeable, Ser. A Fairfield Mfg. Inc., Cumulative Exchangeable, B3 11.25 -- 1,000 1,045,000 PIK Fitzgeralds Gaming Corp., Cumulative Ca 15.00 -- 10,000@ 340,000 Redeemable Granite Broadcasting Corp., Cumulative B1## 12.75 -- 566 647,820 Exchangeable, PIK IXC Communications Inc., Jr. Conv., PIK NR 12.50 -- 670 817,782 Lady Luck Gaming Corp., Ser. A NR 11.50 -- 7,000 273,000 SF Holdings Group Inc., Exchangeable, PIK NR 13.75 -- 110@ 1,006,500 ------------- Total preferred stocks (cost $4,369,565) 4,666,352 - ------------------------------------------------------------------------------------------------------------------------------------ WARRANTS* WARRANTS -------- Benedek Communications Corp. NR -- 7/1/07 5,500 11,000 (cost $0; acquired 10/17/96) MGC Communications, Inc. NR -- 10/1/20 500 17,500 ------------ Total warrants (cost $17,500) 28,500 F-7 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio of Investments as of March 31, 1998 THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== MOODY'S PRINCIPAL RATING INTEREST MATURITY AMOUNT VALUE DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS--125.4% (cost $128,010,923; Note 3) 131,131,119 Liabilities in excess of other assets--(25.4)% (26,572,747) ------------ Net Assets--100% $104,558,372 ============ - -------------- *. --Non-income-producing security ** --Represents issuer in default on interest payments; non-income-producing security. ## --S&P Equivalent to Moody's Rating. + --US$ Denominated Foreign Bonds. @ --Consists of more than 1 class of securities traded together as a unit; generally bonds with attached stock or warrants. NR --Not rated by Moody's or Standard & Poor's. PIK--Payment in Kind. L.L.C. --Limited Liability Corporation. L.L.L.P. --Limited Liability Limited Partnership. L.P. --Limited Partnership. F.R.N. --Floating Rate Note. F-8 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF ASSETS AND LIABILITIES THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== ASSETS MARCH 31, 1998 -------------- Investments, at value (cost $128,010,923)................................................. $131,131,119 Cash...................................................................................... 2,699,939 Receivable for investments sold .......................................................... 5,444,774 Interest and dividends receivable......................................................... 2,910,517 Other assets.............................................................................. 4,770 ------------- Total assets......................................................................... 142,241,119 ------------- LIABILITIES Loan payable (Note 4)..................................................................... 30,000,000 Payable for investments purchased......................................................... 6,484,839 Dividends payable......................................................................... 795,221 Loan interest payable (Note 4)............................................................ 245,672 Accrued expenses.......................................................................... 83,301 Advisory fee payable...................................................................... 44,190 Administration fee payable................................................................ 17,676 Deferred directors' fees.................................................................. 11,848 Total liabilities.................................................................... 37,682,747 ------------- $104,558,372 NET ASSETS................................................................................ Net assets were comprised of: Common stock, at par................................................................. $ 113,485 Paid-in capital in excess of par..................................................... 104,157,299 ------------- 104,270,784 Undistributed net investment income.................................................. 310,599 Accumulated net realized loss on investments......................................... (3,143,207) Net unrealized appreciation of investments........................................... 3,120,196 ------------- Net assets, March 31, 1998........................................................... $104,558,372 ============= Net asset value per share ($104,558,372 / 11,348,544 shares of common stock issued and $9.21 outstanding) ===== F-9 - ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS THE HIGH YIELD PLUS FUND, INC. ================================================================================ NET INVESTMENT INCOME YEAR ENDED MARCH 31, 1998 Income Interest........................................ $11,712,150 Dividends....................................... 225,226 ------------ 11,937,376 Expenses Investment advisory fee.......................... 505,151 Administration fee............................... 202,061 Custodian's fees and expenses.................... 106,000 Legal fees and expenses.......................... 75,000 Reports to shareholders.......................... 57,000 Transfer agent's fees and expenses............... 39,000 Audit fee........................................ 27,000 Insurance expense................................ 25,000 Listing fee...................................... 25,000 Directors' fees and expenses..................... 12,000 Miscellaneous.................................... 10,650 ------------ Total operating expenses ..................... 1,083,862 Loan interest expense (Note 4)................... 1,374,351 ------------ Total expenses................................ 2,458,213 ------------ Net investment income................................. 9,479,163 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investment transactions.......... 5,009,438 Net change in unrealized appreciation of investments.. 2,649,914 ------------ Net gain on investments............................... 7,659,352 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $ 17,138,515 ============ F-10 - --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS THE HIGH YIELD PLUS FUND, INC. ===================================================================================================================== NET INVESTMENT INCOME YEAR ENDED MARCH 31, 1998 Cash flows used for operating activities Interest and dividends received (excluding discount amortization of $615,950)........ $ 11,106,041 Operating expenses paid.............................................................. (823,577) Loan interest and commitment fee paid................................................ (1,515,806) Maturities of short-term portfolio investments, net.................................. 1,350,000 Purchases of long-term portfolio investments......................................... (139,142,949) Proceeds from disposition of long-term portfolio investments......................... 128,334,987 Deferred expenses and other assets................................................... 5,678 ------------ Net cash used for operating activities............................................... (685,626) ------------ Cash provided from financing activities Net increase in notes payable........................................................ 12,000,000 Cash dividends paid (excluding reinvestment of dividends of $876,479)................ (8,614,779) ------------ Net cash provided from financing activities.......................................... 3,385,221 ------------ Net increase in cash................................................................. 2,699,595 Cash at beginning of year............................................................ 344 ------------ Cash at end of year.................................................................. $ 2,699,939 ============ RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET CASH USED FOR OPERATING ACTIVITIES Net increase in net assets resulting from operations...................................... $17,138,515 ----------- Increase in investments................................................................... (10,955,944) Net realized gain on investment transactions.............................................. (5,009,438) Net change in unrealized appreciation of investments...................................... (2,649,914) Increase in receivable for investments sold............................................... (4,484,405) Increase in interest and dividends receivable............................................. (215,385) Decrease in deferred expenses and other assets............................................ 5,678 Increase in payable for investments purchased............................................. 5,366,437 Increase in accrued expenses and other liabilities........................................ 118,830 ----------- Total adjustments.................................................................... ( 17,824,141) ----------- Net cash used for operating activities.................................................... $ (685,626) =========== F-11 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF CHANGES IN NET ASSETS THE HIGH YIELD PLUS FUND, INC. ==================================================================================================================================== INCREASE (DECREASE) YEAR ENDED MARCH 31, ---------------------------------- IN NET ASSETS 1998 1997 ---- ---- Operations Net investment income.............................................................$9,479,163 $ 9,238,631 Net realized gain on investment transactions.......................................5,009,438 2,559,619 Net change in unrealized appreciation/depreciation of investments...................................................................2,649,914 (1,353,218) --------- ------------ Net increase in net assets resulting from operations..............................17,138,515 10,445,032 Dividends from net investment income...................................................(9,479,163) (9,238,631) Distributions in excess of net investment income......................................... (19,779) (170,811) Value of Fund shares issued to shareholders in reinvestment of dividends 876,479 915,455 ------------- ----------- Total increase..........................................................................8,516,052 1,951,045 NET ASSETS Beginning of year......................................................................96,042,320 94,091,275 End of year..........................................................................$104,558,372 $96,042,320 =========== =========== F-12 - ------------------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS THE HIGH YIELD PLUS FUND, INC. ================================================================================ The High Yield Plus Fund, Inc. (the "Fund") was organized in Maryland on February 3, 1988, as a diversified, closed-end management investment company. The Fund had no transactions until April 4, 1988, when it sold 11,000 shares of common stock for $102,300 to Wellington Management Company, LLP (the "Investment Adviser"). Investment operations commenced on April 22, 1988. The Fund's primary objective is to provide a high level of current income to shareholders. The Fund seeks to achieve this objective through investment in publicly or privately offered high yield debt securities rated in the medium to lower categories by recognized rating services or nonrated securities of comparable quality. As a secondary investment objective, the Fund will seek capital appreciation, but only when consistent with its primary objective. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry or region. NOTE 1. ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. SECURITIES VALUATION: Portfolio securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued at the closing bid price or in the absence of such price, as determined in good faith by the Board of Directors of the Fund. Any security for which the primary market is on an exchange is valued at the last sales price on such exchange on the day of valuation or, if there was no sale on such day, the closing bid price. Securities for which no trades have taken place that day are unlisted securities for which market quotations are readily available are valued at the latest bid price. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. CASH FLOW INFORMATION: The Fund invests in securities and pays dividends from net investment income and distributions from net realized gains which are paid in cash or are reinvested at the discretion of shareholders. These activities are reported in the Statement of Changes in Net Assets and additional information on cash receipts and cash payments is presented in the Statement of Cash Flows. Accounting practices that do not affect reporting activities on a cash basis include carrying investments at value and amortizing discounts on debt obligations. Cash, as used in the Statement of Cash Flows, is the amount reported as "Cash" in the Statement of Assets and Liabilities. SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Security transactions are recorded on the trade date. Realized gains and losses from securities transactions are calculated on the identified cost basis. Interest income, which is comprised of three elements; stated coupon rate, original issue discount and market discount, is recorded on an accrual basis. Dividend income is recorded on F-13 the ex-dividend date. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. TAXES. It is the Fund's policy to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders. Therefore, no federal income tax provision is required. DIVIDENDS AND DISTRIBUTIONS. The Fund expects to declare and pay dividends of net investment income monthly and make distributions at least annually of any net capital gains. Dividends and distributions are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. NOTE 2. AGREEMENTS The Fund has agreements with the Investment Adviser and with Prudential Investments Fund Management LLC (the "Administrator"). The Investment Adviser makes investment decisions on behalf of the Fund; the Administrator provides occupancy and certain clerical and accounting services to the Fund. The Fund bears all other costs and expenses. The investment advisory agreement provides for the Investment Adviser to receive a fee, computed weekly and payable monthly at an annual rate of .50% of the Fund's average weekly net assets. The administration agreement provides for the Administrator to receive a fee, computed weekly and payable monthly at an annual rate of .20% of the Fund's average weekly net assets. NOTE 3. PORTFOLIO SECURITIES Purchases and sales of investment securities, other than short-term investments, for the year ended March 31, 1998, were $144,503,792 and $132,812,163, respectively. During the year ended March 31, 1998, the Fund entered into $1,716,750 of securities transactions on a principal basis with Prudential Securities Incorporated, an affiliate of the Administrator. The cost basis of investments for federal income tax purposes is substantially the same as for financial reporting purposes and, accordingly, as of March 31, 1998, net unrealized appreciation for federal income tax purposes was $3,120,196 (gross unrealized appreciation - $5,238,705; gross unrealized depreciation - $2,118,509). For federal income tax purposes, the Fund has a capital loss carryforward as of March 31, 1998 of approximately $3,143,000 of which $1,337,000 expires in 2003 and $1,806,000 expires in 2004. Such carryforward is after utilization of approximately $5,010,000 of net taxable gains realized and recognized during the year ended March 31, 1998. Accordingly, no capital gains distributions are F-14 expected to be paid to shareholders until net gains have been realized in excess of such carryforward. NOTE 4. BORROWINGS The Fund has a credit agreement with an unaffiliated lender. The maximum commitment under this agreement is $30,000,000. Interest on any such borrowings is based on market rates and is payable at maturity. The average daily balance outstanding during the year ended March 31, 1998 was $21,027,397 at a weighted average interest rate of 6.54%. The maximum face amount of borrowings outstanding at any month end during the year ended March 31, 1998 was $30,000,000. The current borrowings of $30,000,000 (at a weighted average interest rate of 6.28%) mature throughout the period from April 3, 1998 to September 28, 1998. The Fund has paid commitment fees at an annual rate of .10 of 1% on any unused portion of the credit facility. Commitment fees are included in "Loan Interest" as reported on the Statement of Assets and Liabilities and on the Statement of Operations. NOTE 5. CAPITAL There are 100 million shares of $.01 par value common stock authorized. During the fiscal years ended March 31, 1998 and 1997, the Fund issued 98,012 and 106,725 shares in connection with reinvestment of dividends, respectively. NOTE 6. DIVIDENDS On February 11, 1998 the Board of Directors of the Fund declared dividends of $0.07 per share payable on April 9 and May 8, 1998 to shareholders of record on March 31 and April 30, 1998, respectively. F-15 REPORT OF INDEPENDENT ACCOUNTANTS THE HIGH YIELD PLUS FUND, INC. ================================================================================ To the Board of Directors and Shareholders of The High Yield Plus Fund, Inc. In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations, of cash flows and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The High Yield Plus Fund, Inc. (the "Fund") at March 31, 1998, the results of its operations and its cash flows for the year then ended and the changes in its net assets and the financial highlights for each of the two years in the period then ended in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. The accompanying financial highlights for each of the three years in the period ended March 31, 1996 were audited by other independent accountants, whose opinion dated May 9, 1996 was unqualified. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York May 14, 1998 We are required by the Internal Revenue Code to advise you within 60 days of the Fund's fiscal year end (March 31, 1998) that 2.23% of the dividends paid in the fiscal year ended March 31, 1998 qualified for the corporate dividends received deduction available to corporate taxpayers. F-16 OTHER INFORMATION (UNAUDITED) THE HIGH YIELD PLUS FUND, INC. ================================================================================ DIVIDEND REINVESTMENT PLAN. Shareholders may elect to have all distributions of dividends and capital gains automatically reinvested in Fund shares (Shares) pursuant to the Fund's Dividend Reinvestment Plan (the Plan). Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in United States dollars mailed directly to the shareholders of record (or if the shares are held in street or other nominee name, then to the nominee) by the custodian, as dividend disbursing agent. Shareholders who wish to participate in the Plan should contact the Fund at (800) 451-6788. State Street Bank and Trust Co. (the Plan Agent) serves as agent for the shareholders in administering the Plan. After the Fund declares a dividend or capital gains distribution, if (1) the market price is lower than net asset value, the participants in the Plan will receive the equivalent in Shares valued at the market price determined as of the time of purchase (generally, following the payment date of the dividend or distribution); or if (2) the market price of Shares on the payment date of the dividend or distribution is equal to or exceeds their net asset value, participants will be issued Shares at the higher of net asset value or 95% of the market price. If net asset value exceeds the market price of Shares on the valuation date or the Fund declares a dividend or other distribution payable only in cash, the Plan Agent will, as agent for the participants, receive the cash payment and use it to buy Shares in the open market. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value per share, the average per share purchase price paid by the Plan Agent may exceed the net asset value per share, resulting in the acquisition of fewer shares than if the dividend or distribution had been paid in shares issued by the Fund. The Fund will not issue Shares under the Plan below net asset value. There is no charge to participants for reinvesting dividends or capital gain distributions, except for certain brokerage commissions, as described below. The Plan Agent's fees for the handling of the reinvestment of dividends and distributions will be paid by the Fund. There will be no brokerage commissions charged with respect to shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any federal income tax that may be payable on such dividends or distributions. The Fund reserves the right to amend or terminate the Plan upon 90 days' written notice to shareholders of the Fund. Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent and will receive certificates for whole Shares and cash for fractional Shares. All correspondence concerning the Plan should be directed to the Plan Agent, State Street Bank & Trust Company, P.O. Box 8200, Boston, MA 02266-8200. F-17 INVESTMENT POLICIES. Based on the evolution of the high yield market over the past several years, the Fund has adopted certain non-fundamental changes to its investment policies. The Fund may invest up to 25% of its total assets in securities that are restricted as to disposition under the federal securities laws or otherwise not readily marketable. Given the dramatic increase in the number of securities issued under Rule 144A of the Securities Act of 1933, securities eligible for resale but are otherwise liquid are no longer subject to this limitation. In addition, given recent developments in the high yield market, the Fund amended its investment policy regarding investment in foreign securities to allow the Fund to invest up to 20% of its total assets in non-U.S. dollar denominated high yield foreign debt securities. F-18 APPENDIX A DESCRIPTION OF RATINGS MOODY'S INVESTORS SERVICE LONG-TERM RATINGS Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuations or protective elements may be of greater amplitude or there may be other elements present which make long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds which are Baa rated are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during other good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. A-1 Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note Moody's applies numerical modifiers 1, 2 and 3 in each generic range classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher SHORT-TERM RATINGS Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations which have an original maturity not exceeding one year. Among the obligations covered are commercial paper, Eurocommercial paper, bank deposits, bankers' acceptances and obligations to deliver foreign exchange. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated. Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: - Leading market positions in well-established industries. - High rates of return on funds employed. - Conservative capitalization structure with moderate reliance on debt and ample asset protection. - Broad margins in earnings coverage of fixed financial charges and high internal cash generation. - Well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will- normally be evidenced by many of the characteristics cited above but to a lesser degree. A-2 Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Preferred Stock Ratings Preferred stock rating symbols and their definitions are as follows: aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future. a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater than in the "aaa" and "aa" classifications, earnings and asset protections are, nevertheless, expected to be maintained at adequate levels. baa An issue which is rated "baa" is considered to be medium grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time. ba An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small. caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments. ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payment. A-3 c This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note Moody's applies numerical modifiers 1, 2 and 3 in each rating classification. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. A-4 STANDARD & POOR'S CORPORATION LONG-TERM ISSUE CREDIT RATINGS AAA An obligation rated `AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment is EXTREMELY STRONG. AA An obligation rated `AA' differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is VERY STRONG. A An obligation rated `A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in the higher rated categories. However, the obligor's capacity to meet its financial commitment is still STRONG. BBB An obligation rated `BBB' exhibits ADEQUATE protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to meet its financial commitment on the obligation. Obligations rated `BB', `B', `CCC', `CC' and `C' are regarded as having significant speculative characteristics. `BB' indicates the least degree of speculation and `C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. BB An obligation rated `BB' is LESS VULNERABLE to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B An obligation rated `B' is MORE VULNERABLE to nonpayment than obligations rated `BB,' but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC An obligation rated `CCC' is CURRENTLY VULNERABLE to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment. CC An obligation rated `CC' is CURRENTLY HIGHLY VULNERABLE to A-5 nonpayment. C The `C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. D An obligation rated `D' is in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The `D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. Plus (+) or Minus (-) The ratings from `AA' to `CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. NR Indicates that no public rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. SHORT-TERM ISSUE CREDIT RATINGS A-1 A short-term obligation rated `A-l' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. A-2 A short-term obligation rated `A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory A-3 A short-term obligation rated `A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. A-6 B A short-term obligation rated `B' is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. C A short-term obligation rated `C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. D A short-term obligation rated `D' is in payment default. The `D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The `D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. DUAL RATING DEFINITIONS Standard & Poor's assigns "dual" ratings to all debt issues that have a put option or demand feature as part of their structure. The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addressed only the demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols for the put option (for example, AAA/A-I +). With short-term demand debt, Standard & Poor's note rating symbols are used with the commercial paper rating symbols (for example, SP-l +/A-l +). The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols are used to denote the put option (for example, "AAA/A-l") or if the nominal maturity is short, a rating of "SP-l +/AAA" is assigned. MUNICIPAL NOTES A Standard & Poor's note ratings reflects the liquidity factors and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment: - Amortization schedule (the longer the final maturity relative to other maturities the more likely it will be treated as a note). - Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note). Note rating symbols are as follows: SP-1 Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. A-7 SP-2 Satisfactory capacity to pay principal and interest with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. PREFERRED STOCK A Standard & Poor's preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock dividends and any applicable sinking fund obligations. A preferred stock rating differs from a bond rating inasmuch as it is assigned to an equity issue, which issue is intrinsically different from, and subordinated to, a debt issue. Therefore, to reflect this difference, the preferred stock rating symbol will normally not be higher than the debt rating symbol assigned to, or that would be assigned to, the senior debt of the same issuer. The preferred stock ratings are based on the following considerations: l. Likelihood of payment - capacity and willingness of the issuer to meet the timely payment of preferred stock dividends and any applicable sinking fund requirements in accordance with the terms of the obligation; 2. Nature of, and provisions of, the issue; 3. Relative position of the issue in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred stock issue and indicates an extremely strong capacity to pay the preferred stock obligations. AA A preferred stock issue rated `AA' also qualifies as a high-quality fixed income security. The capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated `AAA ` . A An issue rated `A' is backed by a sound capacity to pay the preferred stock obligations, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB An issue rated `BBB' is regarded as backed by an adequate capacity to pay the preferred stock obligations. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to make payments for preferred stock in this category than for issues in the `A' category. BB, B Preferred stock rated `BB', `B', or `CCC' is regarded, on CCC balance, as predominantly speculative with respect to the issuer's capacity to pay preferred stock obligations. A-8 `BB' indicates the lowest degree of speculation and `CCC' the highest degree of speculation. While such issues will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CC The rating `CC' is reserved for a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying. C A preferred stock rated `C' is a non-paying issue. D A preferred stock rated `D' is a non-paying issue with the issuer in default on debt instruments. NR This indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Plus (+) or Minus (-) To provide more detailed indications of preferred stock quality, the ratings from `AA' to `CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. A-9 APPENDIX B CHARACTERISTICS OF OPTIONS ON SECURITIES AND ASSOCIATED RISKS The writer of an option receives a premium which it retains whether or not the option is exercised. The Fund's principal objective in writing options is to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. The purchaser of a call option has the right, for a specified period of time, to purchase the securities subject to the option at a specified price (the "exercise price"). By writing a call option, the writer becomes obligated during the term of the option, upon exercise of the option, to sell the underlying securities to the purchaser against receipt of the exercise price. The writer of a call option also loses the potential for gain on the underlying securities in excess of the exercise price of the option during the period that the option is open. Conversely, the purchaser of a put option has the right, for a specified period of time, to sell the securities subject to the option to the writer of the put at the specified exercise price. The writer of an exchange-traded option that wishes to terminate its obligation may effect a "closing purchase transaction". This is accomplished by buying an option of the same series as the option previously written. (Options of the same series are options with respect to the same underlying security, having the same expiration date and the same exercise price.) Likewise, an investor who is the holder of an option may liquidate a position by effecting a "closing sale transaction". This is accomplished by selling an option of the same series as the option previously purchased. There is no guarantee that either a closing purchase or a closing sale transaction can be effected. An exchange-traded option position may be closed out only where there exists a secondary market for an option of the same series. For a number of reasons, a secondary market may not exist for options held by the Fund, or trading in such options might be limited or halted by the exchange on which the option is trading, in which case it might not be possible to effect closing transactions in particular options the Fund has purchased with the result that the Fund would have to exercise the options in order to realize any profit. If the Fund is unable to effect a closing purchase transaction in a secondary market in an option the Fund has written, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. Exchange-traded options in the U.S. are issued by a clearing organization affiliated with the exchange on a which the option is listed which, in effect, gives its guarantee to every exchange-traded option transaction. In contrast, options traded on the over-the-counter market ("OTC options") are contracts between the Fund and its contra-party with no clearing organization guarantee. Thus, when the Fund purchases an OTC option, it relies on the dealer from which it has purchased the OTC option to make or take delivery of the securities underlying the option. Failure by the dealer to do so would result in the loss of the premium paid by the Fund as well as the loss of the expected B-1 benefit of the transaction. The Board of Directors will evaluate the creditworthiness of any dealer from which the Fund proposes to purchase options. Exchange-traded options generally have a continuous liquid market while OTC options may not. Consequently, the Fund will generally be able to realize the value of an OTC option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when the Fund writes an OTC option, it generally will be able to close out the OTC option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Fund originally wrote the OTC option. While the Fund will enter into OTC options only with dealers which agree to, and which are expected to be capable of entering into closing transactions with the Fund, there can be no assurance that the Fund will be able to liquidate an OTC option at a favorable price at any time prior to expiration. Until the Fund is able to effect a closing purchase transaction in a covered OTC call option the Fund has written, it will not be able to liquidate securities used as cover until the option expires or is exercised or different cover is substituted. In the event of insolvency of the contra-party, the Fund may be unable to liquidate an OTC option. With respect to options written by the Fund, the inability to enter into a closing purchase transaction may result in material losses to the Fund. For example, since the Fund must maintain a covered position with respect to any call option on a security it writes, the Fund may be limited in its ability to sell the underlying security while the option is outstanding. This may impair the Fund's ability to sell a portfolio security at a time when such a sale might be advantageous. Currently, many options on equity securities are exchange-traded, whereas options on debt securities are primarily traded on the over-the counter market. In considering the use of options to hedge the Fund's portfolio, particular note should be taken of the following additional considerations: (1) As described in this Prospectus, the Fund may, among other things, purchase call options on debt securities it intends to acquire in order to hedge against anticipated market appreciation in the price of the underlying security. If the market price does increase as anticipated, the Fund will benefit from that increase but only to the extent that the increase exceeds the premium paid and related transaction costs. If the anticipated rise does not occur or if it does not exceed the amount of the premium and related transaction costs, the Fund will bear the expense of the option without gaining an offsetting benefit. If the market price of the debt securities should fall instead of rise, the benefit the Fund obtains from purchasing the securities at a lower price will be reduced by the amount of the premium paid for the call options and by transaction costs. (2) The Fund also may purchase put options on equity securities issued by the issuer of debt securities held by the Fund in order to hedge against declines in the debt securities attributable to the issuer's credit: or may purchase put options on portfolio debt securities when it believes a defensive posture is warranted. Protection is provided during the life of a put option because the put gives the Fund the right to sell the underlying security at the put exercise price, regardless of a decline in the underlying security's market price below the exercise price. This right limits the Fund's losses from the security's possible decline in value below the exercise B-2 price of the option to the premium paid for the option and related transaction costs. If the market price of the Fund's portfolio should increase, however, the profit which the Fund might otherwise have realized will be reduced by the amount of the premium paid for the put option and by transaction costs. (3) The value of an option position will reelect, among other things, the current market price of the underlying security, the time remaining until expiration, the relationship of the exercise price to the market price, the historical price volatility of the underlying security and general market conditions. For this reason, the successful use of options as a hedging strategy depends upon the adviser's ability to forecast the direction of price fluctuations in the underlying securities market. (4) Options normally have expiration dales of up to nine months. The exercise price of the options may be below, equal to or above the current market values of the underlying securities at the time the options are written. Options that expire unexercised have no value. Unless an Option purchased by the Fund is exercised or unless a closing transaction is effected with respect to that position, a loss will be realized in the amount of the premium paid (and related transaction costs). (5) The Fund's activities in the options markets may result in a higher portfolio turnover rate and additional brokerage costs; however, the Fund may also save on commissions and transaction costs by hedging through such activities rather than buying or selling securities in anticipation of market moves. (6) A holder of a stock index option who exercises it before the closing index value for that day is available runs the risk that the level of the underlying index may subsequently change. For example, in the case of a call, if such a change causes the closing index value to fall below the exercise price of the option on that index, the exercising holder will be required to pay the difference between the closing index value and the exercise price of the option. SPECIAL CHARACTERISTICS OF FUTURES AND OPTIONS THEREON AND ASSOCIATED RISKS The Fund may enter into futures contracts for the purchase or sale of certain debt securities, aggregates of debt securities or indices of prices thereof ("interest rate futures contracts"), aggregates of equity securities or indices of prices thereof ("stock index futures contracts"), and other financial indices (collectively, financial futures contracts") and options thereon. A "sale" of a futures contract (or a "short" futures position) means the assumption of a contractual obligation to deliver the securities underlying the contract at a specified price at a specified future time. "A purchase" of a futures contract (or a "long" futures position) means the assumption of a contractual obligation to acquire the securities underlying the contract at a specified price at a specified future time. No price is paid upon entering into a futures contract. Certain futures contracts are settled on a net cash payment basis rather than by the sale and delivery of the securities underlying the futures contracts. U.S. futures contracts and options thereon have been designed B-3 by exchanges that have been designated as "contract markets" by the CFTC and must be executed though a futures commission merchant (i.e., a brokerage firm) which is a member of the relevant contract market. Futures contracts and options thereon trade on these contract markets and the exchange's affiliated clearing organization guarantees performance of the contracts as between the clearing members of the exchange. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the option exercise period. The writer of the option is required upon exercise to assume a short futures position (if the option is a call) or a long futures position (if the option is a put). Upon exercise of the option, the assumption of offsetting futures positions by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance in the writer's futures margin account with respect to that option, which represents the amount by which the market price of the futures contract at exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. At the time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment ("initial margin"). It is expected that the initial margin on U.S. exchanges may range from approximately 5% to approximately 15% of the value of the securities or commodities underlying the contract. Under certain circumstances, however, such as periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment. Additionally, initial margin requirements may be increased generally in the future by regulatory action. An outstanding futures contract is valued daily and the payment in cash of "variation margin" may be required, a process known as "mark to the market". Each day the Fund is required to provide or is entitled to receive variation margin in an amount equal to any decline (in the case of a long futures position) or increase (in the case of a short futures position) in the contract s value since the preceding day. Although futures contracts by their terms may call for the actual delivery or acquisition of underlying securities, in most cases the contractual obligation is extinguished by offset before the expiration of the contract without having to make or take delivery of the securities. The offsetting of a contractual obligation is accomplished by buying (to offset an earlier sale) or selling (to offset an earlier purchase) an identical futures contract calling for delivery in the same month. Such a transaction cancels the obligation to make or take delivery of the underlying securities. The Fund will incur brokerage fees and related transaction costs when it purchases or sells futures contracts. Futures contracts entail special risks. Among other things, the ordinary spreads between values in the cash and futures markets due to differences in the character of these markets, are subject to distortions relating to investors' obligations to meet additional variation margin requirements: decisions to make or take delivery, rather than entering into offsetting transactions; and the difference between margin requirements in the B-4 securities markets and margin deposit requirements in the futures market. The possibility of such distortion means that a correct forecast of general interest rate trends by the Adviser may still not result in a successful transaction. Although the Fund believes that use of such contracts will benefit the Fund, if the Adviser's judgment about the general direction of interest rates is incorrect the Fund's overall performance would be poorer than if it had not entered into any such contracts. For example, if the Fund has hedged against the possibility of an increase in interest rates which would adversely affect the price of debt securities held in its portfolio and interest rates decrease instead, the Fund will lose part or all of the benefit of the increased value of its assets which it has hedged because it will have offsetting losses in its futures positions. In addition, particularly in such situations, if the Fund has insufficient cash, it may have to sell assets from its portfolio to meet daily variation margin requirements. Any such sale of assets may, but will not necessarily, be at increased prices which reflect the rising market. Consequently, the Fund may have to sell assets at a time when it may be disadvantageous to do so. The Fund's ability to establish and close out positions in futures contracts and options on futures contracts will be subject to the development and maintenance of a liquid market. Although the Fund generally will purchase or sell only those futures contracts and options thereon for which there appears to be a liquid market, there is no assurance that a liquid market on an exchange will exist for any particular futures contract or option thereon at any particular time. Although futures contracts on indices of (investment grade) corporate debt securities do currently exist, the markets in these futures contracts are new and highly illiquid. Under certain circumstances, futures exchanges may establish daily limits in the amount that the price of a futures contract or related option contract may vary either up or down from the previous day's settlement price. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may prevent the liquidation of unfavorable positions. Futures or options contract prices could move to the daily limit for several consecutive trading days with little or no trading and thereby prevent prompt liquidation of positions and subject some traders to substantial losses. Where it is not possible to effect a closing transaction in a contract or to do so at a satisfactory price, the Fund would have to make or take delivery under the futures contract, or, in the case of a purchased option, exercise the option. In the case of a futures contract which the Fund has sold and is unable to close out, the Fund would be required to maintain margin deposits on the futures contract and to make arbitration margin payments until the contract is closed. B-5 PART C OTHER INFORMATION Item 24. FINANCIAL STATEMENTS AND EXHIBITS. ---------------------------------- (1) Financial Statements: (a) Financial Highlights, six months ended September 30, 1998 (unaudited); years ended March 31, 1998, 1997, 1996, 1995, 1994, 1993, 1992, 1991 and 1990, and the period April 22, 1988 (commencement of operations) to March 31, 1989. (b) Portfolio of Investments as of March 31, 1998. (c) Statement of Assets and Liabilities, March 31, 1998. (d) Statement of Operations, March 31, 1998. (e) Statement of Cash Flows, March 31, 1998. (f) Statement of Changes in Net Assets, years ended March 31, 1998 and 1997. (g) Notes to Financial Statements. (h) Report of Independent Accountants. Financial Statements (unaudited): (a) Portfolio of Investments as of September 30, 1998. (b) Statement of Assets and Liabilities, September 30, 1998. (c) Statement of Operations for the six months ended September 30, 1998. (d) Statement of Cash Flows for the six months ended September 30, 1998. (e) Statement of Changes in Net Assets for the six months ended September 30, 1998 and the fiscal year ended March 31, 1998. (f) Notes to Financial Statements. (2) Exhibits (a)(1) Articles of Incorporation dated February 3, 1988 -- filed herewith. (a)(2) Articles of Amendment and Restatement dated February 22, 1988 -- filed herewith. (a)(3) Articles of Amendment and Restatement dated April 13, 1988 - filed herewith. (b) By-Laws, as amended May 28, 1997 -- filed herewith. (c) Not applicable. (d)(1) Specimen Certificate for Shares -- to be filed. (d)(2) Form of Subscription Certificate -- to be filed. (d)(3) Form of Notice of Guaranteed Delivery -- to be filed. (d)(4) Form of Nominee Holder Over-Subscription Form -- to be filed. (d)(5) Form of Beneficial Owner Certification -- to be filed. (e) Dividend Reinvestment Plan -- filed herewith. (f) Not applicable. (g) Investment Advisory Agreement with Wellington Management Company/Thorndike, Doran, Paine & Lewis dated April 15, 1988 -- filed herewith. (h)(1) Form of Dealer-Manager Agreement with A.G. Edwards & Sons, Inc. -- to be filed. (h)(2) Form of Soliciting Dealer Agreement -- to be filed. (i) Not applicable. (j) Custody Agreement with State Street Bank and Trust Company dated April 15, 1988 -- filed herewith. (k)(1) Administration Agreement with Prudential Mutual Fund Management, Inc. dated April 15, 1988 -- filed herewith. (k)(2) Registrar, Transfer Agency and Service Agreement with State Street Bank and Trust Company dated April 15, 1988 -- filed herewith. (k)(3) Credit Agreement with the First National Bank of Boston dated as of October 31, 1993 -- filed herewith. (k)(3)(i) First Amendment to Credit Agreement dated as of October 30, 1994 -- filed herewith. (k)(3)(ii) Second Amendment to Credit Agreement dated as of September 1, 1995 -- filed herewith. (k)(3)(iii) Third Amendment to Credit Agreement dated as of May 15, 1996 -- filed herewith. (k)(3)(iv) Fourth Amendment to Credit Agreement dated as of March 11, 1997 -- filed herewith. (k)(3)(v) Fifth Amendment to Credit Agreement dated as of May 22, 1998 -- filed herewith. (k)(4) Form of Subscription Agent Agreement -- to be filed. (k)(5) Form of Information Agent Agreement -- to be filed. (l) Opinion and consent of Kirkpatrick & Lockhart LLP -- to be filed. (m) Not applicable. (n)(1) Consent of PricewaterhouseCoopers LLP -- to be filed. (n)(2) Consent of Deloitte & Touche LLP -- to be filed. (o) Not applicable. (p) Not applicable. (q) Not applicable. (r)(1) Financial Data Schedule for six months ended September 30, 1998 -- to be filed. (r)(2) Financial Data Schedule for fiscal year ended March 31, 1998 -- to be filed. C-2 Item 25. MARKETING ARRANGEMENTS. ---------------------- See Exhibits (h)(1) and (h)(2) of Item 24(2) of this Registration Statement. Item 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. ------------------------------------------- The following table sets forth the expenses to be incurred in connection with the Offer described in this Registration Statement: Registration fees $ National Association of Securities Dealers, Inc. Fees New York Stock Exchange listing fee Printing Accounting fees and expense Legal fees and expenses Dealer-Manager's expense reimbursement Information Agent fees and expenses Subscription Agent fees and expenses Miscellaneous Total $ Item 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT: ------------------------------------------------------------- None Item 28. NUMBER OF HOLDERS OF SECURITIES: ------------------------------- (1) (2) Number of Record Holders Title of Class as of September 30, 1998 -------------- ------------------------- Common Stock 8569 Item 29. INDEMNIFICATION. --------------- Reference is made to the Registrant's By-laws, as amended, filed as Exhibit 2(b), the Dealer-Manager Agreement filed as Exhibit 2(h)(1), the Investment Advisory Agreement filed as Exhibit 2(g), and the Administration Agreement filed as Exhibit 2(k)(1), which provide for indemnification or contribution. The Registrant's officers, Directors and agents also have the benefit of the Maryland General Corporation law provisions regarding indemnification and insurance, including, but not limited to Section 2-418 and Section 2-405.2 thereof, subject also to the indemnification permitted under Sections 17(h) and 17(i) of the 1940 Act and the regulations and releases promulgated by the Commission thereunder. C-3 Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has 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 director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities 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. The Registrant and its directors and officers are insured by a directors and officers/errors and omissions liability policy. Item 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER. ---------------------------------------------------- Wellington Management Company, LLP, a Massachusetts limited liability partnership, is a registered investment adviser engaged in the investment advisory business. Information as to the managing partners of the Adviser is included in its Form ADV filed on March 30, 1987 with the Securities and Exchange Commission (File No. 801-15908), as amended, and is incorporated herein by reference thereto together with all amendments thereto subsequently filed. Item 31. LOCATION OF ACCOUNTS AND RECORDS: -------------------------------- The accounts and records of the Registrant are maintained at the office of the Registrant at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey, 07102 and at the office of its custodian, State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts, 02171. Item 32. MANAGEMENT SERVICES. ------------------- Not applicable. Item 33. UNDERTAKINGS. ------------ (1) The Registrant undertakes to suspend the offering of shares covered hereby until it amends its prospectus contained herein if (i) subsequent to the effective date of this Registration Statement, its net asset value declines more than 10 percent from its net asset value as of the effective date of this Registration C-4 Statement, or (ii) its net asset value increases to an amount greater than its net proceeds as stated in the prospectus contained herein. (2) Not applicable. (3) Not applicable. (4) The Registrant undertakes: a. to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement: (1) to include any prospectus required by Section 10(a)(3) of the 1933 Act [15 U.S.C. 77j(a)(3)]; (2) to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (3) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. b. that, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof; and c. to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (5) The Registrant undertakes that: a. For the purpose of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. b. For the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time C-5 shall be deemed to be the initial bona fide offering thereof. (6) Not applicable. C-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement on Form N-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newark and the State of New Jersey, on the 16th day of November, 1998. THE HIGH YIELD PLUS FUND, INC. By: /s/ THOMAS T. MOONEY* ---------------------- Thomas T. Mooney President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form N-2 has been signed below by the following persons in their capacities as officers and Directors of the Registrant. SIGNATURES TITLE DATE - ---------- ----- ---- /s/ Thomas T. Mooney* President, Treasurer and November 16, 1998 - --------------------- Director Thomas T. Mooney /s/ Eugene C. Dorsey* Director November 16, 1998 - -------------------- Eugene C. Dorsey /s/ Douglas H. McCorkindale* Director November 16, 1998 - --------------------------- Douglas H. McCorkindale - -------- * Signatures affixed by Stephanie A. Djinis pursuant to a Power of Attorney dated November 2, 1998, a copy of which is filed herewith. C-7 POWER OF ATTORNEY I, the undersigned Director of the following investment company: THE HIGH YIELD PLUS FUND, INC. (the "Fund"), hereby constitute and appoint each of Stephanie A. Djinis and Arthur J. Brown my true and lawful attorney-in-fact, with full power of substitution, and with full power to sign for me and in my name in the appropriate capacity, any Registration Statements on Form N-2, and any Pre-Effective Amendments and Post-Effective Amendments to said Registration Statements, any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorney-in-fact deems necessary or appropriate, to comply with the provisions of the Securities Act of 1933 and the Investment Company Act of 1940, and all related requirements of the Securities and Exchange Commission. I hereby ratify and confirm all that said attorney-in-fact or his or her substitutes may do or cause to be done by virtue hereof. WITNESS my hand as of the date set forth below. SIGNATURE DATE - --------- ---- /s/ Eugene C. Dorsey November 2, 1998 - -------------------- Eugene C. Dorsey /s/ Thomas T. Mooney November 2, 1998 - -------------------- Thomas T. Mooney /s/ Douglas H. McCorkindale November 2, 1998 - ------------------------------ Douglas H. McCorkindale INDEX OF EXHIBITS 2(a)(1) Articles of Incorporation dated February 3, 1988 2(a)(2) Articles of Amendment and Restatement dated February 22, 1988 2(a)(3) Articles of Amendment and Restatement dated April 13, 1988 2(b) By-Laws, as amended May 28, 1997 2(e) Dividend Reinvestment Plan 2(g) Investment Advisory Agreement with Wellington Management Company /Thorndike, Doran, Paine & Lewis dated April 15, 1988 2(j) Custody Agreement with State Street Bank and Trust Company dated April 15, 1988 2(k)(1) Administration Agreement with Prudential Mutual Fund Management, Inc. dated April 15, 1988 2(k)(2) Registrar, Transfer Agency and Service Agreement with State Street Bank and Trust Company dated April 15, 1988 2(k)(3) Credit Agreement with the First National Bank of Boston dated as of October 31, 1993 2(k)(3)(i) First Amendment to Credit Agreement dated as of October 30, 1994 2(k)(3)(ii) Second Amendment to Credit Agreement dated as of September 1, 1995 2(k)(3)(iii) Third Amendment to Credit Agreement dated as of May 15, 1996 2(k)(3)(iv) Fourth Amendment to Credit Agreement dated as of March 11, 1997 2(k)(3)(v) Fifth Amendment to Credit Agreement dated as of May 22, 1998 EX-99.2(A)(1) 2 Exhibit 2(a)(1) ARTICLES OF INCORPORATION OF THE HIGH YIELD PLUS FUND, INC. FIRST: INCORPORATION: I, William W. Pollock, whose post office address is 1800 M Street, N.W. Washington, D.C. 20036, being at least eighteen years of age, do, under and by virtue of Public General Laws of the State of Maryland authorizing the formation of Corporations, associate myself as Incorporator with the intention of forming a corporation. SECOND: NAME OF CORPORATION: The name of the Corporation is THE HIGH YIELD PLUS FUND, INC. (the "Corporation"). THIRD: CORPORATE PURPOSES: A. The Corporation is formed for the purpose of acting as a closed-end, diversified management investment company registered as such with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, as amended, and to exercise and enjoy all powers, rights, and privileges granted to and conferred upon corporations by the Public General Laws of Maryland now or hereafter in force, including: 1. To hold, invest, and reinvest the funds of the Corporation, and to purchase, subscribe for or otherwise acquire, hold for investment, trade and deal in, sell, assign, negotiate, transfer, exchange, lend, pledge or otherwise dispose of, or turn to account or realize upon securities of any corporation, association, trust, firm, or other organization however or whenever established or organized, as well as securities issued by the United States Government or the government of any state, municipality, or other political subdivision, or any other governmental or quasi-governmental agency or instrumentality. For the purpose of these Articles, the term "securities" includes: stocks, shares, bonds, debentures, bills, time notes and deposits, mortgages, and any other obligations or evidence of indebtedness; any certificates, receipts, warrants, options, or other instruments representing rights or obligations to receive, purchase, subscribe for or sell the same, or evidencing or representing any other right or interest, including all rights of equitable ownership, in any property or assets; and any negotiable or non-negotiable instruments including money market instruments, bank certificates of deposit, finance paper, commercial paper, bankers' acceptances, and all types of repurchase and reverse repurchase agreements; 2. To enjoy all rights, powers, and privileges of ownership or interest in all securities held by the Corporation, including the right to vote and otherwise act with respect to the preservation, protection, improvement, and enhancement in value of all such securities; 3. To issue and sell shares of its own capital stock, including shares in fractional denominations, and securities which are convertible or exchangeable, with or without the payment of additional consideration, into such capital stock in such amounts and on such terms and for such amount or kind of consideration (including securities) now or hereafter permitted by the laws of the State of Maryland and by these 2 Articles of Incorporation as its Board of Directors may, and which is hereby authorized to, determine; 4. To purchase, repurchase or otherwise acquire, hold, dispose of, resell, transfer, reissue, or cancel shares of its own capital stock in any manner and to the extent now or hereafter permitted by the laws of the State of Maryland and by these Articles of Incorporation; 5. To transact its business, carry on its operations, have one or more offices, and to exercise all of its corporate powers and rights in any state, territory, district, and possession of the United States, and in any foreign country; 6. To aid by further investment any issuer of which the Corporation holds any obligation or in which it has a direct or indirect interest, to perform any act designed to protect, preserve, improve, or enhance the value of such obligation or interest, and to guarantee or become a surety on any or all of the contracts, stocks, bonds, notes, debentures, and obligation of any corporation, company, trust association, or firm; and 7. To generally transact any business in connection with or incidental to its corporate purposes, and to do everything necessary, suitable, or proper for the accomplishment of such purposes or for the attainment of any object or furtherance of any purpose set forth in these Articles, either alone or in association with others. 3 B. The foregoing clauses shall be construed both as objects and powers, and the enumeration of specific powers shall not be held to limit or restrict in any manner the general powers of the Corporation. C. Incident to meeting the purposes specified above, the Corporation shall also have the power, without limitation: 1. To acquire by purchase, lease or otherwise, and to own, hold, use, maintain, develop, and dispose of any interest in real or personal property, wherever located; 2. To borrow money and issue notes or other evidences of indebtedness in connection therewith; and 3. To buy, sell, and otherwise deal in and with commodities, indices of commodities or securities, and foreign exchange, including the purchase and sale of futures contracts and options on futures contracts related thereto, subject to any applicable provisions of law. FOURTH: ADDRESS OF PRINCIPAL OFFICE. The post office address of the principal office of the Corporation in the State of Maryland is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202-3242. FIFTH: NAME AND ADDRESS OF RESIDENT AGENT. The name and address of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202-3242. 4 SIXTH: CAPITAL STOCK. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 100,000,000 shares of Common Stock, $.01 par value, having an aggregate par value of $1,000,000. Stockholders shall not have preemptive rights to acquire any shares of the stock of the Corporation, and any or all of such shares, whenever authorized, may be issued, or reissued and transferred if reacquired and have treasury status, to any person, firm, corporation, or association for such lawful consideration and on such terms as the Board of Directors determines in its discretion without first offering the share to any such holder. All shares of authorized common stock, when issued for such consideration as the Board of Directors may determine, shall be fully paid and nonassessable. Voting power for the election of directors and for all other purposes shall be vested exclusively in the holders of the Common Stock. SEVENTH: BOARD OF DIRECTORS. The number of directors shall not be less than one. Until the first annual meeting of the Corporation and until his successor is elected and qualified, Thomas T. Mooney shall act as director. EIGHTH: MANAGEMENT OF THE AFFAIRS OF THE CORPORATION. 5 A. All corporate powers and authority of the Corporation shall be vested in and exercised by the Board of Directors except as otherwise provided by statute, these Articles, or the By-Laws of the Corporation. B. The Board of Directors shall have the power to adopt, alter, or repeal the By-Laws of the Corporation, unless the By-Laws otherwise provide. C. The Board of Directors shall have the power to determine whether and to what extent, and at what times and places, and under what conditions and regulations the accounts and books of the Corporation (other than the stock ledger) shall be open to inspection by stockholders. No stockholder shall have any right to inspect any account, book, or document of the Corporation except to the extent permitted by statute or the By-Laws. D. The Board of Directors shall have the power to determine, in accordance with generally accepted accounting principles, the net income, total assets, and the net asset value of the shares of Common Stock, of the Corporation. The Board of Directors may delegate such power to any one or more of the directors or officers of the Corporation, the investment adviser, administrator, custodian, or depository of the Corporation's assets, or another agent of the Corporation appointed for such purposes. E. The Board of Directors shall have the power to make distributions, including dividends, from any legally available funds in such amounts, and in a manner and to the stockholders of record of such a date as the Board of Directors may determine. NINTH: STOCKHOLDER LIABILITY. The stockholders shall not be liable to any extent for the payment of any debt of the Corporation. 6 TENTH: MAJORITY OF VOTES. A. Notwithstanding any provision of the Maryland General Corporation Law requiring a greater proportion than a majority of the votes entitled to be cast in order to take or authorize any action, any action may be taken or authorized by the Corporation upon the affirmative vote of at least a majority of the votes entitled to be cast, except as set forth in part D of this Tenth section. B. The affirmative vote or consent of the holders of sixty-six and two-thirds (66 2/3) percent or more of the Corporation's shares is required to authorize any of the following transactions: 1. Conversion of the Corporation from a closed-end investment company to an open-end investment company; 2. Merger or consolidation of the Corporation with or into any other corporation that is directly or indirectly the beneficial owner of five percent or more of the outstanding shares of the Corporation; 3. Issuance of any securities of the Corporation for cash to any person or entity that is directly or indirectly the beneficial owner of five percent or more of the outstanding shares of the Corporation; 4. Sale, lease, or exchange of all or any substantial part of the assets of the Corporation to any person or entity that is directly or indirectly the beneficial owner of five percent or more of the outstanding shares of the Corporation, except assets having an aggregate fair market value of less than $1,000,000; or 7 5. Sale, lease, or exchange to the Corporation, in exchange for securities of the Corporation, of any assets of any person or entity that is directly or indirectly the beneficial owner of five percent or more of the outstanding shares of the Corporation, except assets having an aggregate fair market value of less than $1,000,000. ELEVENTH: RIGHT OF AMENDMENT. Except as set forth below, any provision of these Articles of Incorporation may be amended, altered, or repealed upon the affirmative vote of the holders of a majority of the shares of Common Stock. Any amendment, alteration, or repeal of Section Ten, Part B requires the affirmative vote or consent of the holders of sixty-six and two-thirds (66 2/3) percent or more of the shares of the Corporation. IN WITNESS WHEREOF, I have signed these Articles of Incorporation and acknowledge the same to be my act on this 3rd day of February, 1988. /s/ William W. Pollock ----------------------------------- William W. Pollock 8 EX-99.2(A)(2) 3 Exhibit 2(a)(2) ARTICLES OF AMENDMENT AND RESTATEMENT OF THE ARTICLES OF INCORPORATION OF THE HIGH YIELD PLUS FUND, INC. THE HIGH YIELD PLUS FUND, INC., a Maryland corporation, having its principal office in Maryland in the City of Baltimore (the "Corporation"), hereby certifies to the Maryland Department of Assessments and Taxation that: I. The Corporation desires to amend and restate its charter as currently in effect; II. The Articles of Incorporation of the Corporation are hereby amended and restated as follows: III. A majority of the Board of Directors of the Corporation on February 17, 1998 approved and advised the foregoing amended and restated Articles of Incorporation, and the sole shareholder of the Corporation approved the foregoing amended and restated Articles of Incorporation on February 17, 1998. VI. The current address of the principal office of the Corporation in Maryland is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202-3242. V. The name and address of the Corporation's current resident agent is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202-3242. VI. The provisions set forth in these Articles of Amendment and Restatement are all of the provisions of the charter currently in effect. VII. The number of directors of the Corporation is five. The directors of the Corporation at the date hereof are Thomas T. Mooney, Edward D. Beach, Walter F. Mondale, Daniel S. Ahearn and Robin B. Smith. IN WITNESS WHEREOF, The High Yield Plus Fund, Inc. has caused these presents to be signed in its name and on its behalf by its President and attested to by its Secretary on this 17th day of February, 1988. THE HIGH YIELD PLUS FUND, INC. By: /s/ Edward D. Beach ------------------------ Edward D. Beach President Attest: /s/ Arthur J. Brown - --------------------------- Arthur J. Brown, Secretary THE UNDERSIGNED, who executed on behalf of the Corporation the foregoing Articles of Amendment and Restatement, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of the Corporation, the foregoing Articles of Amendment and Restatement to be the corporate act of the Corporation and further certifies that to the best of his knowledge, information, and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties for perjury. /s/ Edward D. Beach ------------------------ Edward D. Beach President EX-99.2(A)(3) 4 Exhibit 2(a)(3) ARTICLES OF AMENDMENT AND RESTATEMENT OF THE ARTICLES OF INCORPORATION OF THE HIGH YIELD PLUS FUND, INC. ============================================================================== THE HIGH YIELD PLUS FUND, INC., a Maryland corporation, having its principal office in Maryland in the City of Baltimore (the "Corporation"), hereby certifies to the Maryland Department of Assessments and Taxation that: I. The Corporation desires to amend and restate its charter as currently in effect; II. The Articles of Incorporation of the Corporation are hereby amended and restated as follows: III. The Board of Directors of the Corporation has by unanimous written consent approved and advised the foregoing amended and restated Articles of Incorporation, and the sole shareholder of the Corporation approved the foregoing amended and restated Articles of Incorporation on April 13, 1988. IV. The current address of the principal office of the Corporation in Maryland is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202-3242. V. The name and address of the Corporation's current resident agent is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202-3242. VI. The provisions set forth in these Articles of Amendment and Restatement are all of the provisions of the charter currently in effect. VII. The number of directors of the Corporation is five. The directors of the Corporation at the date hereof are Thomas T. Mooney, Edward D. Beach, Walter F. Mondale, Daniel S. Ahearn and Robin B. Smith. IN WITNESS WHEREOF, The High Yield Plus Fund, Inc. has caused these presents to be signed in its name and on its behalf by its President and attested to by its Secretary on this 13th day of April, 1988. THE HIGH YIELD PLUS FUND, INC. B: /s/ Edward D. Beach ------------------------------- Edward D. Beach President Attest: /s/ Arthur J. Brown - ----------------------------- Arthur J. Brown, Secretary 2 THE UNDERSIGNED, who executed on behalf of the Corporation the foregoing Articles of Amendment and Restatement, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of the corporation, the foregoing Articles of Amendment and Restatement to be the corporate act of the Corporation and further certifies that to the best of his knowledge, information, and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties for perjury. /s/ Edward D. Beach ------------------------------- Edward D. Beach President 10 EX-99.2(B) 5 Exhibit 2(b) THE HIGH YIELD PLUS FUND, INC. A Maryland Corporation BY-LAWS AS AMENDED May 28, 1997 TABLE OF CONTENTS PAGE ARTICLE I. NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL...................................................1 Section 1. Name...........................................1 Section 2. Principal Offices..............................1 Section 3. Seal...........................................1 ARTICLE II. STOCKHOLDERS...............................................1 Section 1. Annual Meetings................................1 Section 2. Special Meetings...............................1 Section 3. Notice of Meetings.............................2 Section 4. Quorum and Adjournment of Meetings.....................................2 Section 5. Voting and Inspectors..........................2 Section 6. Validity of Proxies............................3 Section 7. Stock Ledger and List of Stockholders......................................3 Section 8. Action Without Meeting.........................3 ARTICLE III. BOARD OF DIRECTORS.........................................3 Section 1. Powers.........................................3 Section 2. Number and Term of Directors...................4 Section 3. Election.......................................4 Section 4. Vacancies and Newly Created Directorships......4 Section 5. Removal........................................4 Section 6. Chairman of the Board..........................4 Section 7. Annual and Regular Meetings....................5 Section 8. Special Meetings...............................5 Section 9. Waiver of Notice...............................5 Section 10. Quorum and Voting..............................5 Section 11. Action Without a Meeting.......................5 Section 12. Compensation of Directors......................6 ARTICLE IV. COMMITTEES ...............................................6 Section 1. Organization...................................6 Section 2. Executive Committee............................6 Section 3. Proceedings and Quorum.........................6 ARTICLE V. OFFICERS 7 Section 1. General........................................7 Section 2. Election, Tenure and Qualifications............7 Section 3. Vacancies and Newly Created Officers...........7 Section 4. Removal and Resignation........................7 i Section 5. President......................................7 Section 6. Vice President.................................8 Section 7. Treasurer and Assistant Treasurers.............8 Section 8. Secretary and Assistant Secretaries............8 Section 9. Subordinate Officers...........................8 Section 10. Remuneration...................................8 Section 11. Surety Bond....................................8 ARTICLE VI. CAPITAL STOCK..............................................9 Section 1. Certificates of Stock..........................9 Section 2. Transfer of Shares.............................9 Section 3. Stock Ledgers..................................9 Section 4. Transfer Agents and Registrars................10 Section 5. Fixing of Record Date.........................10 Section 6. Lost, Stolen or Destroyed Certificates........10 ARTICLE VII. FISCAL YEAR AND ACCOUNTANT................................10 Section 1. Fiscal Year...................................10 Section 2. Accountant....................................10 ARTICLE VIII. CUSTODY OF SECURITIES.....................................11 Section 1. Employment of a Custodian.....................11 Section 2. Termination of Custodian Agreement............11 Section 3. Other Arrangements............................11 ARTICLE IX. INDEMNIFICATION AND INSURANCE.............................12 Section 1. Indemnification of Officers, Directors, Employees and Agents..........................12 Section 2. Insurance of Officers, Directors, Employees and Agents........................................13 ARTICLE X. AMENDMENTS................................................13 Section 1. General.......................................13 Section 2. By Stockholders Only..........................13 Section 3. Certain Amendments Requiring More than Majority Approval...................................13 ii BY-LAWS OF THE HIGH YIELD PLUS FUND, INC. (A MARYLAND CORPORATION) ARTICLE I NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL SECTION 1. NAME. The name of the Corporation is The High Yield Plus Fund, Inc. SECTION 2. PRINCIPAL OFFICES. The principal office of the Corporation in the State of Maryland shall be located in Baltimore, Maryland. The Corporation may, in addition, establish and maintain such other offices and places of business as the Board of Directors may, from time to time, determine. SECTION 3. SEAL. The corporate seal of the Corporation shall be circular in form and shall bear the name of the Corporation, the year of its incorporation, and the word "Maryland." The form of the seal shall be subject to alteration by the Board of Directors and the seal may be used by causing it or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any officer or Director of the Corporation shall have authority to affix the corporate seal of the Corporation to any document requiring the same. ARTICLE II STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. An annual meeting of stockholders shall be held as required and for the purposes prescribed by the Investment Company Act of 1940, as amended, and the laws of the State of Maryland and for the election of Directors and the transaction of such other business as may properly come before the meeting. The meeting shall be held annually within the fifth month following the end of the Corporation's fiscal year, at a time within that period set by the Board of Directors, at the Corporation's principal offices, or at such place within the United States as the Board of Directors shall select. SECTION 2. SPECIAL MEETINGS. Special meetings of stockholders may be called at any time by the President or by a majority of the Board of Directors, and shall be held at such time and place as may be stated in the notice of the meeting. Special meetings of the stockholders may be called by the Secretary upon the written request of the holders of shares entitled to not less than twenty-five percent of all the votes entitled to be cast at such meeting, provided that (1) such request shall state the purposes of such meeting and the matters proposed to be acted on, and (2) the stockholders requesting such meeting shall have paid to the Corporation the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such stockholders. No special meeting shall be called upon the request of stockholders to consider any matter which is substantially the same as a matter voted upon at any special meeting of the stockholders held during the preceding twelve months, unless requested by the holders of a majority of all shares entitled to be voted at such meeting. SECTION 3. NOTICE OF MEETINGS. The Secretary shall cause notice of the place, date and hour, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, to be mailed, postage prepaid, not less than ten nor more than ninety days before the date of the meeting, to each stockholder entitled to vote at such meeting at his or her address as it appears on the records of the Corporation at the time of such mailing. Notice shall be deemed to be given when deposited in the United States mail addressed to the stockholders as aforesaid. Notice of any stockholders' meeting need not be given to any stockholder who shall sign a written waiver of such notice whether before or after the time of such meeting, or to any stockholder who is present at such meeting in person or by proxy. Notice of adjournment of a stockholders' meeting to another time or place need not be given if such time and place are announced at the meeting. Irregularities in the notice of any meeting to, or the nonreceipt of any such notice by, any of the stockholders shall not invalidate any action otherwise properly taken by or at any such meeting. SECTION 4. QUORUM AND ADJOURNMENT OF MEETINGS. The presence at any stockholders' meeting, in person or by proxy, of stockholders entitled to cast a majority of the votes shall be necessary and sufficient to constitute a quorum for the transaction of business. In the absence of a quorum, the holders of a majority of shares entitled to vote at the meeting and present in person or by proxy, or, if no stockholder entitled to vote is present in person or by proxy, any officer present entitled to preside or act as Secretary of such meeting may adjourn the meeting without determining the date of the new meeting or from time to time without further notice to a date not more than 120 days after the original record date. Any business that might have been transacted at the meeting originally called may be transacted at any such adjourned meeting at which a quorum is present. SECTION 5. VOTING AND INSPECTORS. At each stockholders' meeting, each stockholder shall be entitled to one vote for each share of stock of the Corporation validly issued and outstanding and standing in his or her name on the books of the Corporation on the record date fixed in accordance with Section 5 of Article VI hereof, either in person or by proxy appointed by instrument in writing subscribed by such stockholder or his or her duly authorized attorney. If no record date has been fixed, the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be the later of the close of business on the day on which notice of the meeting is mailed or the thirtieth day before the meeting, or, if notice is waived by all stockholders, at the close of business on the tenth day next preceding the day on which the meeting is held. Except as otherwise specifically provided in the Articles of Incorporation, these By-Laws or the Investment Company Act of 1940, as amended, all matters shall be decided by a vote of a majority of the shares of stock of the 2 Corporation outstanding and entitled to vote. The vote upon any question shall be by ballot whenever requested by any person entitled to vote, but, unless such a request is made, voting may be conducted in any way approved by the meeting. At any meeting at which there is an election of Directors, the chairman of the meeting may, and upon the request of the holders of ten percent of the stock entitled to vote at such election shall, appoint two inspectors of election who shall first subscribe an oath or affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability, and shall, after the election, make a certificate of the result of the vote taken. No candidate for the office of Director shall be appointed as an inspector. SECTION 6. VALIDITY OF PROXIES. The right to vote by proxy shall exist only if the instrument authorizing such proxy to act shall have been signed by the stockholder or by his or her duly authorized attorney. Unless a proxy provides otherwise, it shall not be valid more than eleven months after its date. All proxies shall be delivered to the Secretary of the Corporation or to the person acting as Secretary of the meeting before being voted, who shall decide all questions concerning qualification of voters, the validity of proxies, and the acceptance or rejection of votes. If inspectors of election have been appointed by the chairman of the meeting, such inspectors shall decide all such questions. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of such proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise. SECTION 7. STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or Assistant Secretary of the Corporation to cause an original or duplicate stock ledger to be maintained at the office of the Corporation's transfer agent. SECTION 8. ACTION WITHOUT MEETING. Any action required or permitted to be taken by stockholders at a meeting of stockholders may be taken without a meeting if (1) all stockholders entitled to vote on the matter consent to the action in writing, (2) all stockholders entitled to notice of the meeting but not entitled to vote at it sign a written waiver of any right to dissent, and (3) the consents and waivers are filed with the records of the meetings of stockholders. Such consent shall be treated for all purposes as a vote at the meeting. ARTICLE III BOARD OF DIRECTORS SECTION 1. POWERS. Except as otherwise provided by operation of law, by the Articles of Incorporation, or by these By-Laws, the business and affairs of the Corporation shall be managed under the direction of and all the powers of the Corporation shall be exercised by or under authority of its Board of Directors. 3 SECTION 2. NUMBER AND TERM OF DIRECTORS. Except for the initial Board of Directors, the Board of Directors shall consist of not fewer than three nor more than eleven Directors, as specified by a resolution of a majority of the entire Board of Directors, provided that at least forty percent of the entire Board of Directors shall be persons who are not interested persons of the Corporation, as that term is defined in the Investment Company Act of 1940. Directors need not be stockholders of the Corporation. All acts done at any meeting of the Directors or by any person acting as a Director, so long as his or her successor shall not have been duly elected or appointed, shall, notwithstanding that it be afterwards discovered that there was some defect in the election of the Directors or of such person acting as a Director or that they or any of them were disqualified, be as valid as if the Directors or such other person, as the case may be, had been duly elected and were or was qualified to be Directors or a Director of the Corporation. The Board of Directors shall be divided into three classes, as nearly equal in size as possible, with members of each class holding office for a term of three years and until his or her successor is elected and qualified, or his or her earlier death, resignation or removal. At the first annual meeting of the Corporation, the shareholders shall elect three separate classes of Directors, with terms to end one, two, and three years respectively from the date of such meeting. At each subsequent annual meeting, one class of directors shall be elected. SECTION 3. ELECTION. At the first annual meeting of stockholders and at each annual meeting thereafter, Directors shall be elected by vote of the holders of a majority of the shares present in person or by proxy and entitled to vote thereon. SECTION 4. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. If any vacancies shall occur in the Board of Directors by reason of death, resignation, removal or otherwise, or if the authorized number of Directors shall be increased, the Directors then in office shall continue to act, and such vacancies (if not previously filled by the stockholders) may be filled by a majority of the Directors then in office, although less than a quorum, except that a newly created Directorship may be filled only by a majority vote of the entire Board of Directors; provided, however, that immediately after filling such vacancy, at least two-thirds (2/3) of the Directors then holding office shall have been elected to such office by the stockholders of the Corporation. In the event that at any time, other than the time preceding the first annual stockholders' meeting, less than a majority of the Directors of the Corporation holding office at that time were elected by the stockholders, a meeting of the stockholders shall be held promptly and in any event within sixty days for the purpose of electing Directors to fill any existing vacancies in the Board of Directors, unless the Securities and Exchange Commission shall by order extend such period. SECTION 5. REMOVAL. The stockholders may remove any Director from office for cause, upon the affirmative vote or consent of the holders of at least eighty percent of the common stock of the Corporation, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of the removed Director or Directors. SECTION 6. CHAIRMAN OF THE BOARD. The Board of Directors may, but shall not be required to, elect a Chairman of the Board. Any Chairman of the Board shall be elected from among the Directors of the Corporation and may hold such office only so long as he continues to be a Director. The Chairman, if any, shall 4 preside at all stockholders' meetings and at all meetings of the Board of Directors, and shall be ex officio a member of all committees of the Board of Directors. The Chairman, if any, shall have such powers and perform such duties as may be assigned from time to time by the Board of Directors. SECTION 7. ANNUAL AND REGULAR MEETINGS. The annual meeting of the Board of Directors for choosing officers and transacting other proper business shall be held after the annual stockholders' meeting at the place of such meeting or at such other time and place as the Board may determine. The Board of Directors from time to time may provide by resolution for the holding of regular meetings and fix their time and place within or outside the State of Maryland, provided that regular meetings of the Board shall be held at least once every calendar quarter other than the quarter during which its annual meeting is held. Notice of such annual and regular meetings need not be in writing, provided that written notice of any change in the time or place of such meetings shall be sent promptly to each Director not present at the meeting at which such change was made, in the manner provided in Section 8 of this Article III for notice of special meetings. Except as otherwise provided under the Investment Company Act of 1940, as amended, members of the Board of Directors or any committee designated thereby may participate in a meeting (other than the annual meeting of the Board) of such Board or committee and in any action taken therein by means of a conference telephone or similar communications equipment that allows all persons participating in the meeting to hear each other at the same time. SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time or place and for any purpose when called by the President or by a majority of the Directors. Notice of special meetings, stating the time and place, shall be (1) mailed to each Director at his or her residence or regular place of business at least five days before the day on which a special meeting is to be held or (2) delivered to him or her personally or transmitted to him or her by telegraph, telefax, telex, cable or wireless at least one day before the meeting. SECTION 9. WAIVER OF NOTICE. No notice of any meeting need be given to any Director who is present at the meeting or who waives notice of such meeting in writing (which waiver shall be filed with the records of such meeting), either before or after the time of the meeting. SECTION 10. QUORUM AND VOTING. At all meetings of the Board of Directors, the presence of a majority of the number of Directors then in office shall constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the Directors present may adjourn the meeting, from time to time, until a quorum shall be present. The action of a majority of the Directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless concurrence of a greater proportion is required for such action by law, by the Articles of Incorporation or by these By-Laws. SECTION 11. ACTION WITHOUT A MEETING. Except as otherwise provided under the Investment Company Act of 1940, as amended, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent to such action is signed by all members of the Board or of such committee, as the case may be, and such 5 written consent is filed with the minutes of proceedings of the Board or committee. SECTION 12. COMPENSATION OF DIRECTORS. Directors shall be entitled to receive such compensation from the Corporation for their services as may from time to time be determined by resolution of the Board of Directors in the manner provided by Section 10 of this Article III. ARTICLE IV COMMITTEES SECTION 1. ORGANIZATION. By resolution adopted by the Board of Directors, the Board may designate one or more committees, including an Executive Committee. The Chairmen of such committees shall be elected by the Board of Directors. Each committee must be comprised of two or more members, each of whom must be a Director and shall hold committee membership at the pleasure of the Board. The Board of Directors shall have the power at any time to change the members of such committees and to fill vacancies in the committees. The Board may delegate to these committees any of its powers, except the power to declare a dividend or distribution on stock, authorize the issuance of stock, recommend to stockholders any action requiring stockholders' approval, amend these By-Laws, approve any merger or share exchange which does not require stockholder approval, approve or terminate any contract with an investment adviser or principal underwriter, as those terms are defined in the Investment Company Act of 1940, or to take any other action required by the Investment Company Act of 1940 to be taken by the Board of Directors. SECTION 2. EXECUTIVE COMMITTEE. Unless otherwise provided by resolution of the Board of Directors, when the Board of Directors is not in session, the Executive Committee, if one is designated by the Board, shall have and may exercise all powers of the Board of Directors in the management of the business and affairs of the Corporation that may lawfully be exercised by an Executive Committee. The President shall automatically be a member of the Executive Committee. SECTION 3. PROCEEDINGS AND QUORUM. In the absence of an appropriate resolution of the Board of Directors, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable. In the event any member of any committee is absent from any meeting, the members thereof present at the meeting, whether or not they constitute a quorum, may appoint a member of the Board of Directors to act in the place of such absent member. ARTICLE V OFFICERS SECTION 1. GENERAL. The officers of the Corporation shall be a President, a Secretary, and a Treasurer, and may include one or more Vice Presidents, Assistant Secretaries or Assistant Treasurers, and such other officers as may be 6 appointed in accordance with the provisions of Section 9 of this Article. SECTION 2. ELECTION, TENURE AND QUALIFICATIONS. The officers of the Corporation, except those appointed as provided in Section 9 of this Article V, shall be elected by the Board of Directors at its first annual meeting or such meetings as shall be held prior to its first annual meeting, and thereafter annually at its annual meeting. If any officers are not chosen at any annual meeting, such officers may be chosen at any subsequent regular or special meeting of the Board. Except as otherwise provided in this Article V, each officer chosen by the Board of Directors shall hold office until the next annual meeting of the Board of Directors and until his or her successor shall have been elected and qualified. Any person may hold one or more offices of the Corporation except that no one person may serve concurrently as both president and vice president. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer. No officer need be a Director. SECTION 3. VACANCIES AND NEWLY CREATED OFFICERS. If any vacancy shall occur in any office by reason of death, resignation, removal, disqualification or other cause, or if any new office shall be created, such vacancies or newly created offices may be filled by the Board of Directors at any regular or special meeting or, in the case of any office created pursuant to Section 9 hereof, by any officer upon whom such power shall have been conferred by the Board of Directors. SECTION 4. REMOVAL AND RESIGNATION. Any officer may be removed from office by the vote of a majority of the members of the Board of Directors given at a regular meeting or any special meeting called for such purpose, if the Board has determined the best interests of the Corporation will be served by removal of that officer. Any officer may resign from office at any time by delivering a written resignation to the Board of Directors, the President, the Secretary, or any Assistant Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. SECTION 5. PRESIDENT. The President shall be the chief executive officer of the Corporation and, in the absence of the Chairman of the Board or if no Chairman of the Board has been elected, shall preside at all stockholders' meetings and at all meetings of the Board of Directors and shall in general exercise the powers and perform the duties of the Chairman of the Board. Subject to the supervision of the Board of Directors, he or she shall have general charge of the business, affairs and property of the Corporation and general supervision over its officers, employees and agents. Except as the Board of Directors may otherwise order, he or she may sign in the name and on behalf of the Corporation all deeds, bonds, contracts, or agreements. He or she shall exercise such other powers and perform such other duties as from time to time may be assigned to him or her by the Board of Directors. SECTION 6. VICE PRESIDENT. The Board of Directors may from time to time elect one or more Vice Presidents who shall have such powers and perform such duties as from time to time may be assigned to them by the Board of Directors or the President. At the request or in the absence or disability of the President, the Vice President (or, if there are two or more Vice Presidents, then the senior of 7 the Vice Presidents present and able to act) may perform all the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. SECTION 7. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall be the principal financial and accounting officer of the Corporation and shall have general charge of the finances and books of account of the Corporation. Except as otherwise provided by the Board of Directors, he or she shall have general supervision of the funds and property of the Corporation and of the performance by the Custodian of its duties with respect thereto. He or she shall render to the Board of Directors, whenever directed by the Board, an account of the financial condition of the Corporation and of all transactions as Treasurer; and as soon as possible after the close of each financial year he or she shall make and submit to the Board of Directors a like report for such financial year. He or she shall perform all acts incidental to the office of Treasurer, subject to the control of the Board of Directors. Any Assistant Treasurer may perform such duties of the Treasurer as the Treasurer or the Board of Directors may assign, and, in the absence of the Treasurer, may perform all the duties of the Treasurer. SECTION 8. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall attend to the giving and serving of all notices of the Corporation and shall record all proceedings of the meetings of the stockholders and Directors in books to be kept for that purpose. He or she shall keep in safe custody the seal of the Corporation, and shall have responsibility for the records of the Corporation, including the stock books and such other books and papers as the Board of Directors may direct and such books, reports, certificates and other documents required by law to be kept, all of which shall at all reasonable times be open to inspection by any Director. He or she shall perform such other duties which appertain to this office or as may be required by the Board of Directors. Any Assistant Secretary may perform such duties of the Secretary as the Secretary or the Board of Directors may assign, and, in the absence of the Secretary, may perform all the duties of the Secretary. SECTION 9. SUBORDINATE OFFICERS. The Board of Directors from time to time may appoint such other officers or agents as it may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Board of Directors may determine. The Board of Directors from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Any officer or agent appointed in accordance with the provisions of this Section 9 may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Board of Directors. SECTION 10. REMUNERATION. The salaries or other compensation of the officers of the Corporation shall be fixed from time to time by resolution of the Board of Directors in the manner provided by Section 10 of Article III, except that the 8 Board of Directors may by resolution delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents appointed in accordance with the provisions of Section 9 of this Article V. SECTION 11. SURETY BOND. The Board of Directors may require any officer or agent of the Corporation to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder) to the Corporation in such sum and with such surety or sureties as the Board of Directors may determine, conditioned upon the faithful performance of his or her duties to the Corporation, including responsibility for negligence and for the accounting of any of the Corporation's property, funds or securities that may come into his or her hands. ARTICLE VI CAPITAL STOCK SECTION 1. CERTIFICATES OF STOCK. The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the Board of Directors may from time to time authorize. No certificate shall be valid unless it is signed by the President or a Vice President and countersigned by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation and sealed with the seal of the Corporation, or bears the facsimile signatures of such officers and a facsimile of such seal. SECTION 2. TRANSFER OF SHARES. Shares of the Corporation shall be transferable on the books of the Corporation by the holder of record thereof in person or by his duly authorized attorney or legal representative (i) upon surrender and cancellation of a certificate or certificates for the same number of shares of the same class, duly endorsed or accompanied by proper instruments of assignment and transfer, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require, or (ii) as otherwise prescribed by the Board of Directors. The shares of stock of the Corporation may be freely transferred, and the Board of Directors may, from time to time, adopt rules and regulations with reference to the method of transfer of the shares of stock of the Corporation. The Corporation shall be entitled to treat the holder of record of any share of stock as the absolute owner thereof for all purposes, and accordingly shall not be bound to recognize any legal, equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law or the statutes of the State of Maryland. SECTION 3. STOCK LEDGERS. The stock ledgers of the Corporation, containing the names and addresses of the stockholders and the number of shares held by them respectively, shall be kept at the principal offices of the Corporation or, if the Corporation employs a transfer agent, at the offices of the transfer agent of the Corporation. SECTION 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may from time to time appoint or remove transfer agents and/or registrars of transfers for shares of stock of the Corporation, and it may appoint the same person as both transfer agent and registrar. Upon any such appointment being made all certificates representing shares of capital stock thereafter issued shall be 9 countersigned by one of such transfer agents or by one of such registrars of transfers or by both and shall not be valid unless so countersigned. If the same person shall be both transfer agent and registrar, only one countersignature by such person shall be required. SECTION 5. FIXING OF RECORD DATE. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any stockholders' meeting or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, provided that (1) such record date shall be within ninety days prior to the date on which the particular action requiring such determination will be taken; (2) the transfer books shall not be closed for a period longer than twenty days; and (3) in the case of a meeting of stockholders, the record date or any closing of the transfer books shall be at least ten days before the date of the meeting. SECTION 6. LOST STOLEN OR DESTROYED CERTIFICATES. Before issuing a new certificate for stock of the Corporation alleged to have been lost, stolen or destroyed, the Board of Directors or any officer authorized by the Board may, in its discretion, require the owner of the lost, stolen or destroyed certificate (or his or her legal representative) to give the Corporation a bond or other indemnity, in such form and in such amount as the Board or any such officer may direct and with such surety or sureties as may be satisfactory to the Board or any such officer, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VII FISCAL YEAR AND ACCOUNTANT SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall, unless otherwise ordered by the Board of Directors, be the twelve calendar months ending on the 31st day of March. SECTION 2. ACCOUNTANT. A.The Corporation shall employ an independent public accountant or a firm of independent public accountants as its Accountant to examine the accounts of the Corporation and to sign and certify financial statements filed by the Corporation. The Accountant's certificates and reports shall be addressed both to the Board of Directors and to the stockholders. The employment of the Accountant shall be conditioned upon the right of the Corporation to terminate the employment forthwith without any penalty by vote of a majority of the outstanding voting securities at any stockholders' meeting called for that purpose. B. A majority of the members of the Board of Directors who are not interested persons (as defined in the Investment Company Act of 1940, as amended) of the Corporation shall select the Accountant at any meeting held within thirty days before or after the beginning of the fiscal year of the Corporation or before the annual stockholders' meeting in that year. The selection shall be submitted 10 for ratification or rejection at the next succeeding annual stockholders' meeting. If the selection is rejected at that meeting, the Accountant shall be selected by majority vote of the Corporation's outstanding voting securities, either at the meeting at which the rejection occurred or at a subsequent meeting of stockholders called for the purpose of selecting an Accountant. C.Any vacancy occurring between annual meetings due to the resignation of the Accountant may be filled by the vote of a majority of the members of the Board of Directors who are not interested persons. ARTICLE VIII CUSTODY OF SECURITIES SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Corporation shall place and at all times maintain in the custody of a Custodian (including any sub-custodian for the Custodian) all funds, securities and similar investments owned by the Corporation. The Custodian (and any sub-custodian) shall be a bank or trust company of good standing having aggregate capital, surplus and undivided profits not less than fifty million dollars ($50,000,000) or such other financial institution as shall be permitted by rule or order of the Securities and Exchange Commission. The Custodian shall be appointed from time to time by the Board of Directors, which shall fix its remuneration. SECTION 2. TERMINATION OF CUSTODIAN AGREEMENT. Upon termination of the agreement for services with the Custodian or inability of the Custodian to continue to serve, the Board of Directors shall promptly appoint a successor Custodian, but in the event that no successor Custodian can be found who has the required qualifications and is willing to serve, the Board of Directors shall call as promptly as possible a special meeting of the stockholders to determine whether the Corporation shall function without a Custodian or shall be liquidated. If so directed by resolution of the Board of Directors or by vote of the holders of a majority of the outstanding shares of stock of the Corporation, the Custodian shall deliver and pay over all property of the Corporation held by it as specified in such vote. SECTION 3. OTHER ARRANGEMENTS. The Corporation may make such other arrangements for the custody of its assets (including deposit arrangements) as may be required by any applicable law, rule or regulation. ARTICLE IX INDEMNIFICATION AND INSURANCE SECTION 1. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS. To the maximum extent permitted by applicable law (including Maryland law and the Investment Company Act of 1940) as currently in effect or as may hereafter be amended, the Corporation shall indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative ("Proceeding") by reason of the fact that he or she is or was a Director, officer or employee of the Corporation, or is or was serving at the request of 11 the Corporation as a director, officer, or employee of another corporation, partnership, joint venture, trust, or other enterprise, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with a Proceeding. Notwithstanding the foregoing, the following provisions shall apply with respect to indemnification of any such persons and the Corporation's investment adviser: A. Whether or not there is an adjudication of liability in a Proceeding, the Corporation shall not indemnify any such person for any liability arising by reason of such person's willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office or under any contract or agreement with the Corporation ("disabling conduct"). B. The Corporation shall indemnify any such person if: (1) the court or other body before which a Proceeding was brought (a) dismisses the Proceeding for insufficiency of evidence of any disabling conduct, or (b) reaches a final decision on the merits that such person was not liable by reason of disabling conduct; or (2) absent such a decision, a reasonable determination is made, based upon a review of the facts, by (a) the vote of a majority of a quorum of the Directors of the Corporation who are neither interested persons of the Corporation as defined in the Investment Company Act of 1940, as amended, nor parties to the Proceeding, or (b) if such quorum is not obtainable, or even if obtainable, if a majority of a quorum of Directors described above so directs, based upon a written opinion by independent legal counsel, that such person was not liable by reason of disabling conduct. C. Expenses (including attorneys' fees) incurred by any such person in defending a Proceeding will be paid by the Corporation in advance of the final disposition thereof upon an undertaking by such person to repay such expenses unless it is ultimately determined that he or she is entitled to indemnification, if: (1) such person shall provide adequate security for his or her undertaking; (2) the Corporation shall be insured against losses arising by reason of such advance; or (3) a majority of a quorum of the Directors of the Corporation who are neither interested persons of the Corporation as defined in the Investment Company Act of 1940, as amended, nor parties to the Proceeding, or independent legal counsel in a written opinion, shall determine, based on a review of readily 12 available facts that there is reason to believe that such person will be found to be entitled to indemnification. SECTION 2. INSURANCE OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS. The Corporation may purchase and maintain insurance or other sources of reimbursement on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her and incurred by him or her in or arising out of his position. ARTICLE X AMENDMENTS SECTION 1. GENERAL. Except as provided in Sections 2 and 3 of this Article X, all By-Laws of the Corporation, whether adopted by the Board of Directors or the stockholders, shall be subject to amendment, alteration or repeal, and new By-Laws may be made by the affirmative vote of a majority of either: (1) the holders of record of the outstanding shares of stock of the Corporation entitled to vote, at any annual or special meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new By-Law; or (2) the Directors, at any regular or special meeting the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new By-Law. SECTION 2. BY STOCKHOLDERS ONLY. No amendment of any section of these By-Laws shall be made except by the stockholders of the Corporation if the By-Laws provide that such section may not be amended, altered or repealed except by the stockholders. From and after the issue of any shares of the capital stock of the Corporation no amendment, alteration or repeal of Article X shall be made except by the affirmative vote of the holders of either: (a) more than two-thirds of the Corporation's outstanding shares present at a meeting at which the holders of more than fifty percent of the outstanding shares are present in person or by proxy, or (b) more than fifty percent of the Corporation's outstanding shares. SECTION 3. CERTAIN AMENDMENTS REQUIRING MORE THAN MAJORITY APPROVAL. No amendment of Article III, Sections 2 and 5 concerning the terms of Directors and removal of Directors shall be made except by the affirmative vote or consent of the holders of at least eighty percent of the Corporation's outstanding shares. EX-99.2(E) 6 Exhibit 2(e) TERMS AND CONDITIONS OF STOCK DIVIDEND REINVESTMENT PLAN 1. You, State Street Bank and Trust Company, will act as Agent for me, and will open an account for me under the Stock Dividend Reinvestment Plan in the same name as my present shares are registered, and put into effect for me the dividend reinvestment option of the Plan as of the first record date for a dividend or capital gains distribution after you receive the Authorization duly executed by me. 2. Whenever High Yield Plus Fund, Inc. (the "Fund") declares a capital gains distribution payable in shares of common stock or cash at the option of the shareholders, I hereby elect to take such distribution entirely in shares of common stock, and you shall automatically receive such shares, including fractions, for my account, except in the circumstances described in Paragraph 4 below. I understand that the number of additional shares to be credited to my account shall be determined by dividing the dollar-amount of the capital gains distribution payable on my shares by the net asset value per share of the Fund's common stock on the valuation date; provided that, for purposes of determining the number of additional shares to be credited to my account, net asset value shall not be less than 95% of the then current market price per share. I also understand that the valuation date will be the record date for such distribution. 3. Whenever the fund declares an income dividend payable in shares of common stock or cash at the option of the shareholders, I hereby elect to take such dividend entirely in shares of common stock, and you shall automatically receive such shares, including fractions, for my account, except in the circumstances described in paragraph 4 below. I understand that the number of additional shares to be credited to my account shall be determined by dividing the dollar amount of the dividend payable on my snares by the net asset value per share of the Fund's common stock on the valuation date; provided that, for purposes of determining the number of additional shares to be credited to my account, net asset value shall not be less than 95% of the then current market price per share. I also understand that the valuation date will be the record date for the dividend. 4. Should the net asset value per share of the fund's common stock exceed the Market Price per share on the valuation date for an optional stock or cash income dividend or capital gains distribution, I elect to take such dividend or distribution entirely in cash. In such event and also in the event that the fund declares an income dividend or capital gains distribution payable only in cash, you shall apply the amount of such dividend or distribution on my shares (less my pro rata share of brokerage commissions incurred with respect to your open-market purchases in connection with the reinvestment of such dividend or distribution) to the purchase on the open market of shares of the fund's common stock for my account. Such purchases will be made on or shortly after the payment date for such dividend or distribution, and in no event more than 30 days after such date except where temporary curtailment or suspension of purchase is necessary to comply with applicable provisions of federal securities law. 5. For all purposes of the Plan: (a) the market price of the Fund's common stock on a particular date shall be the last sales price on the New York Stock Exchange on that date, or, if there is no sale on such exchange on that date, then the mean between the closing bid and asked quotations for such stock on such Exchange on such date and (b) net asset value per share of the Fund's common stock on a particular date shall be as determined by or on behalf of the Fund. 6. Open-market purchases provided for above may be made on any securities exchange where the Fund's common stock is traded, in the over-the-counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as you shall determine. My funds held by you uninvested will not bear interest, and it is understood that, in any event, you shall have no liability in connection with any inability to purchase shares within 30 days after the initial date of such purchase as herein provided, or with the timing of any purchases effected. You shall have no responsibility as to the value of the common stock of the Fund acquired for my account. For the purposes of cash investments you may commingle my funds with those of other shareholders of the fund for whom you similarly act as Agent, and the average price (including brokerage commissions) of all shares purchased by you as Agent shall be the price per share allocable to me in connection therewith. 7. You may hold my shares acquired pursuant to my Authorization, together with the shares of other shareholder, of the Fund acquired pursuant to similar authorizations, in non-certificated form in your name or that of your nominee. You will forward .o me any proxy solicitation material and will vote any shares so held for me only in accordance with the proxy returned by me to the Fund. Upon my written request, you will deliver to me, without charge, a certificate or certificates for the full shares. 8. You will confirm to me each acquisition made for my account as soon as practicable but not later than 60 days after the date thereof. Although I may from time to time have an undivided fractional interest (computed to three decimal places) in a share of the Fund, no certificates for a fractional share will be issued. however, dividends and distributions on fractional shares will be credited to my account. In the event of termination of my account under the plan, you will adjust of. any such undivided fractional interest in cash at the market value of the Fund's shares at the time of termination less the pro rata expense of any sale required to make such an adjustment. 9. Any stock dividends or split shares distributed by the Fund on shares held by you for me will be credited to my account. In the event that the fund makes available to its shareholders rights to purchase additional shares or other securities, the shares held for me under the Plan will be added to other shares held by me in calculating the number of rights to be issued to me. 10. Your service fee for handling capital gains distributions or income dividends will be paid by the Fund. I will be charged a $.75 service fee for each voluntary cash investment and pro rata share of brokerage commissions on all open market purchase. 11. I may terminate my account under the plan by notifying you in writing. Such termination will be effective immediately if my notice is received by you not less than ten days prior to any dividend or distribution record date; otherwise such termination will be effective on the first trading day after the payment date for such dividend or distribution with respect to any subsequent dividend 2 or distribution. The plan may be terminated by you or the Fund upon notice in writing ,mailed to me at least 90 days Prior to any record date for the Payment of any dividend or distribution by the Fund. Upon any termination you will cause a certificate or certificates for the full shares held for me under the Plan and cash adjustment for any fraction to be delivered to me without charge. If I elect by notice o you in writing in advance of such termination to have you sell part or all of my shares and remit the proceeds to me, you are authorized to deduct a $2.50 fee plus brokerage commissions or this transaction from the proceeds. 12. These terms and conditions may be amended or supplemented by you or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to me appropriate written notice prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by me unless, prior to the effective date thereof, you receive written notice of the termination of my account under the Plan. Any such amendment may include an appointment by you in your place and stead of a successor Agent under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Agent under these terms and conditions. Upon any such appointment of an Agent for the purpose of receiving dividends and distributions, the Fund will be authorized to pay to such successor Agent, for my account, all dividends and distributions payable on common stock of the fund held in my name or under the Plan for retention or application by such successor Agent as provided in these terms and conditions. 13. You shall at all times act in good faith and agree to use your best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement and to comply with applicable law, but assume no responsibility and shall not be liable for loss or damage due to errors unless such errors are caused by your negligence, bad faith, or willful misconduct or that of your employees. 14. These terms and conditions shall be governed by the laws of the Commonwealth of Massachusetts. 3 EX-99.2(G) 7 Exhibit 2(g) INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 15th day of April, 1988 by and between The High Yield Plus Fund, Inc., a Maryland corporation (the "Fund"), and Wellington Management Company/Thorndike, Doran, Paine & Lewis, a Massachusetts partnership (the "Investment Adviser"). WHEREAS, the Fund is a closed-end, diversified management investment company registered under the Investment Company Act of 1940, as amended, and the shares of the Fund are registered for sale to the public under the Securities Act of 1933; and WHEREAS, the Fund desires to retain the Investment Adviser to render investment management services to the Fund and the Investment Adviser is willing to render such services; NOW, THEREFORE, in consideration of mutual covenants herein contained, the parties hereto agree as follows: 1. DUTIES OF INVESTMENT ADVISER The Investment Adviser shall manage the investment and reinvestment of the Fund's assets; continuously review, supervise, and administer the investment program of the Fund; determine in its discretion the securities to be purchased, retained, sold, pledged or loaned (and implement those decisions); determine in its discretion when, to what extent and under what terms the Fund shall engage in bank or other borrowing (and, together with the Fund's Administrator or such other parties s the Investment Adviser may select, implement those determinations); provide the Fund with records concerning the Investment Adviser's activities which the Fund is required to maintain; render regular reports to the Fund's officers and Directors concerning the Investment Adviser's discharge of the foregoing responsibilities; and supply the Fund's officers and Directors with all statistical information and reports reasonably required by them and reasonably available to the Investment Adviser. The Investment Adviser shall discharge the foregoing responsibilities subject to the control of the officers and the Directors of the Fund and in compliance with such policies as the Directors may from time to time establish, and in compliance with the objectives, policies, and limitations of the Fund set forth in the Fund's prospectus, as amended from time to time, and with all applicable laws and regulations. The Investment Adviser agrees, at its own expense, to render the services described herein and to provide the office space, furnishings and equipment and the personnel required by it to perform those services on the terms and for the compensation provided herein; provided that expenses for necessary services of parties other than the Investment Adviser rendered in connection with the activities described above shall be borne by those parties, or by the Fund, as appropriate. The Investment Adviser shall authorize and permit any of its officers, partners and employees, who may be elected as officers or Directors of the Fund, to serve in the capacities in which they are elected. 2. PORTFOLIO TRANSACTIONS. The Investment Adviser is authorized to arrange for the execution of the Fund's portfolio transactions by selecting the brokers or dealers that will execute the purchases and sales of portfolio securities for the Fund and is directed to use its best efforts to obtain the best net results as described in the Fund's prospectus, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm involved. The Investment Adviser may, in its discretion, purchase and sell portfolio securities through 2 brokers who provide the Adviser or the Fund with research, analysis, advice and similar services, and the Investment Adviser may pay to these brokers, in return for research and analysis, a higher commission than may be charged by other brokers, provided that the Investment Adviser determines in good faith that such commission is reasonable in terms either of that particular transaction or of the overall responsibility of the Investment Adviser to the Fund and the Adviser's other clients and that the total commission paid by the Fund will be reasonable in relation to the benefits to the Fund over the long term. 3. COMPENSATION OF THE INVESTMENT ADVISER. For the services to be rendered by the Investment Adviser as provided in Sections 1 and 2 of this Agreement, the Fund shall pay to the Investment Adviser, as promptly as possible, after the last day of each month, a fee at the annual rate of .50% of the Fund's average net assets, based on the average weekly net asset value. The first payment of the fee shall be made as promptly as possible at the end of the month next succeeding the effective date of this Agreement, and shall constitute a full payment of the fee due the Investment Adviser for all services rendered pursuant to this Agreement prior to that date. In the event that the Investment Adviser's right to such fee commences to accrue to a date other than the first day of the month, the fee provided in this Section shall be computed on the basis of the period beginning on the first business day on which this Agreement is in effect, subject to a pro rata adjustment based on the number of days in that period as a percentage of the 3 total number of days in such month. In the event of termination of this Agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current fiscal month as a percentage of the total number of days in such month. The average weekly net asset value of the Fund shall in all cases be based only on those days when the New York Stock Exchange is open for business, and be computed as of the time of the regular close of business of the New York Stock Exchange, or such other time as may be determined by the Board of Directors of the Fund. Each fee payment to the Investment Adviser shall be accompanied by a report of the Fund prepared either by the Fund's Administrator or by a reputable firm of independent accountants which shall show the amount properly payable to the Investment Adviser under this Agreement and the detailed computation thereof. 4. OTHER SERVICES. At the request of the Fund, the Investment Adviser in its discretion may make available to the Fund office facilities, equipment, personnel, and services other than as set forth in Sections 1 and 2 of this Agreement. Such office facilities, equipment, personnel, and services shall be provided for or rendered by the Investment Adviser and billed to the Fund at the Investment Adviser's cost. 5. REPORTS. The Fund and the Investment Adviser agree to furnish to each other, if applicable, current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request. 6. STATUS OF INVESTMENT ADVISER. 4 The services of the Investment Adviser to the Fund are not to be deemed exclusive, and the Investment Adviser shall be free to render similar services to others as long as its services to the Fund are not impaired thereby. The Investment Adviser shall be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. Nothing in this Agreement shall limit or restrict the right of any director, officer or employee of the Investment Adviser, who may also be a director, officer or employee of the Fund, to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any other business, whether of a similar nature or a dissimilar nature. 7. CERTAIN RECORDS. Any records required to be maintained and preserved pursuant to the provisions of Rule 31a-1 and Rule 31a-2 promulgated under the Investment Company Act of 1940 which are prepared or maintained by the Investment Adviser on behalf of the Fund are the property of the Fund and will be surrendered promptly to the Fund on request. 8. LIABILITY OF INVESTMENT ADVISER. The Investment Adviser shall not be liable for any error of judgment or for any loss suffered by the Fund in connection with performance of its obligations under this Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of, or from reckless disregard by it of its obligations and duties under, this Agreement, or damages resulting from a breach of fiduciary duty with respect to receipt of compensation for services. 5 9. PERMISSIBLE INTERESTS. Directors, officers, agents and shareholders of the Fund are or may be interested in the Investment Adviser (or any successor thereof) as partners, officers or otherwise; partners, officers, agents, and shareholders of the Investment Adviser are or may be interested in the Fund as Directors, officers, shareholders or otherwise; and the Investment Adviser (or any successor) is or may be interested in the Fund as a shareholder or otherwise. 10. DURATION AND TERMINATION. If approved by holders of a majority of the outstanding voting securities of the Fund at the first shareholders' meeting following the date of this Agreement, and unless sooner terminated as provided herein, this Agreement shall continue until April 15, 1990, and thereafter for periods of one year, so long as such continuance thereafter is specifically approved at least annually (a) by the vote of a majority of those Directors of the Fund who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval, and (b) by the Directors of the Fund or by vote of a majority of the outstanding voting securities of the Fund; provided, however, that if the shareholders of the Fund fail to approve the Agreement as provided herein, the Investment Adviser may continue to serve hereunder in the manner and to the extent permitted by the Investment Company Act of 1940 and rules hereunder. The foregoing requirement that continuance of this Agreement be "specifically approved at least annually" shall be construed in a manner consistent with the Investment Company Act of 1940 and the rules and regulations thereunder. This Agreement may be terminated at any time without the payment of any penalty by vote of a majority of Directors of the Fund or by vote of a majority of the outstanding voting securities of the Fund on 60 days' written notice to the Investment Adviser, or by the Investment Adviser at any time without the payment of any penalty, on 60 days' written notice to the Fund. This Agreement will automatically and 6 immediately terminate in the event of its assignment. Any notice under this Agreement shall be given in writing, addressed and delivered, or mailed postpaid, to the other party at any office of such party. As used in this Section 10, the terms "assignment", "interested person", and a "vote of a majority of the outstanding voting securities" shall have the respective meanings set forth in the Investment Company Act of 1940 and the rules and regulations thereunder, subject to such exceptions as may be granted by the Securities and Exchange Commission under the Investment Company Act of 1940. 11. SEVERABILITY. If any provisions of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 12. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment of this Agreement shall be effective until approved by vote of the holders of a majority of the Fund's outstanding voting securities. 13. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLINGTON MANAGEMENT COMPANY/ THE HIGH YIELD PLUS FUND, INC. THORNDIKE, DORAN, PAINE & LEWIS By: _________________________________ By: ________________________________ 8 EX-99.2(J) 8 040688-1 Exhibit 2(j) CUSTODIAN CONTRACT Between THE HIGH YIELD PLUS FUND, INC. and STATE STREET BANK AND TRUST COMPANY SCE 2/88 WP0704c TABLE OF CONTENTS Page 1. Employment of Custodian and Property to be Held By It....................1 2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian....................................................................2 2.1 Holding Securities....................................................2 2.2 Delivery of Securities...............................................2 2.3 Registration of Securities...........................................5 2.4 Bank Accounts........................................................5 2.5 Availability of Federal Funds........................................6 2.6 Collection of Income.................................................6 2.7 Payment of Fund Monies...............................................7 2.8 Liability for Payment in Advance of Receipt of Securities Purchased..9 2.9 Appoint of Agents....................................................9 2.10 Deposit of Fund Assets in Securities System........................10 2.11 Fund Assets Held in the Custodian's Direct Paper System............12 2.12 Segregated Account.................................................13 2.13 Ownership Certificates for Tax Purposes............................14 2.14 Proxies............................................................14 2.15 Communication Relating to Fund Portfolio Securities................14 2.16 Proper Instructions................................................15 2.17 Actions Permitted without Express Authority........................16 2.18 Evidence of Authority..............................................16 3. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian...................................................................17 4. Records..................................................................17 5. Opinion of Fund's Independent Accountant.................................18 i 6 Reports to Fund by Independent Public Accountants.........................18 7. Compensation of Custodian................................................18 8. Responsibility of Custodian..............................................18 9. Effective Period, Termination and Amendment..............................19 10. Successor Custodian.....................................................21 11. Interpretive and Additional Provisions..................................22 12. Additional Funds........................................................22 13. Massachusetts Law to Apply..............................................22 14. Prior Contracts.........................................................23 15. Notices.................................................................23 ii CUSTODIAN CONTRACT This Contract between The High Yield Plus Fund, Inc., a corporation organized and existing under the laws of Maryland, having its principal place of business at One Seaport Plaza, New York, New York 10292, hereinafter called the "Fund", and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian", WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: 1 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT The Fund hereby employs the Custodian as the custodian of its assets pursuant to the provisions of the Articles of Incorporation. The Fund agrees to deliver to the Custodian all securities and cash owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock, $.0l par value, ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian. Upon receipt of "Proper Instructions" (within the meaning of Section 2.15), the Custodian shall from time to time employ one or more sub-custodians, but only in accordance with an applicable vote by the Board of Directors of the Fund, and provided that the Custodian shall have no more or less responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian 80 employed than any such sub-custodian has to the Custodian. 1 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE CUSTODIAN 2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for the account of the Fund all non-cash property, including all securities owned by the Fund, other than (a) securities which are maintained pursuant to Section 2.10 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury, collectively referred to herein as "Securities System" and (b) commercial paper of an issuer for which State Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper System of the Custodian pursuant to Section 2.10A. 2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver securities owned by the Fund held by the Custodian or in a Securities System account of the Custodian or in the Custodian's Direct Paper book entry system account ("Direct Paper System Account") only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) Upon sale of such securities for the account of the Fund and receipt of payment therefor; 2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund; 3) In the case of a sale effected through a Securities System, in accordance with the provisions of Section 2.10 hereof; 4) To the depository agent in connection with tender or other similar offers for portfolio securities of the Fund; 2 5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration 18 to be delivered to the Custodian; 6) To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee name of any sub-custodian appointed pursuant to Article l; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; PROVIDED that. in any such case, the new securities are to be delivered to the Custodian; 7) Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any 1088 arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct; 8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) In the case of warrants, options, rights or similar securities, the surrender thereof in the exercise of such warrants, options, rights or similar securities or the 3 surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) For delivery in connection with any loans of securities made by the Fund, BUT ONLY against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral; 11) For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, BUT ONLY against receipt of amounts borrowed; 12) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the Exchange Act ) and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating the rules of The Options to compliance with Clearing Corporation and of and registered national securities exchange or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund; 4 13) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund; and 14) For any other proper corporate purpose, BUT ONLY upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made. 5 2.3 REGISTRATION OF SECURITIES. Securities held by the Custodian (other than bearer securities) shall be registered In the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, UNLESS the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in street name" or other good delivery form. 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank account or accounts in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the Custodian for the Fund may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; PROVIDED, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall be approved by vote of a majority of the Board of Directors of the Fund. Such funds shall be deposited 6 by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. 2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund and the Custodian, the Custodian shall, upon the receipt of Proper Instructions, make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of the Fund which are deposited into the Fund's account. 2.6 COLLECTION OF INCOME. The Custodian shall collect on a timely basis all income and other payments with respect to regl6tered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due the Fund on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian wi1l have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled. 7 2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of the Fund in the following cases only: 1) Upon the purchase of securities, options, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or option on futures contracts to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the Investment Company Act of 1940, as amended, to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Fund or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 2.10 hereof; (c) in the case of a purchase involving the Direct Paper System, in accordance with the conditions set forth in Section 2.10A; (d) in the case of repurchase agreements entered into between the Fund and the Custodian, or another bank, or a broker-dealer which is A member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Fund of securities owned by the Custodian along with written 8 evidence of the agreement by the Custodian to repurchase such securities from the Fund or (e) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined in Section 2.15; 2) In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof; 3) For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; 4) For the payment of any dividends declared pursuant to the governing documents of the Fund; 5) For payment of the amount of dividends received in respect of securities sold short; 6) For any other proper purpose, BUT ONLY upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors or of the Executive Committee of the Fund signed by an officer of 9 the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made. 2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED. Except as specifically stated otherwise in this Contract, in any and every case where payment for purchase of securities for the account of the Fund is made by the Custodian In advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay In advance, the Custodian shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian. 2.9 APPOINT OF AGENTS. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out such of the provisions of this Article 2 as the Custodian may from time to time direct; PROVIDED, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. 2.10 DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEM. The Custodian may deposit and/or maintain securities owned by the Fund in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the 10 U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) The Custodian may keep securities of the Fund in a Securities System provided that such securities are represented in an account (Account) of the Custodian in the Securities System which shall not Include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers: 2) The records of the Custodian with respect to securities of the Fund which are maintained in a Securities System shall identify by book-entry those securities belonging to the Fund; 3) The Custodian shall pay for securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of each transfer to or from the account of the 11 Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund. 4) The Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, Internal accounting control and procedures for safeguarding securities deposited in the Securities System; 5) The Custodian shall have received the initial or annual certificate, as the case may be, required by Article 9 hereof; 6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any such loss or damage. 12 2.11 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian may deposit and/or maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions: 1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions; 2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund; 4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Fund; 5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the Securities System for the account of the Fund. 13 6) The Custodian shall provide the Fund with any report on its system of internal accounting control as the Fund may reasonably request from time to time. 2.12 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained In an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of secretaries cash or government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchaser or sold by the Fund, (ii) for the purposes of compliance BY the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper corporate purposes, BUT ONLY, in the case of clause (iv), upon receipt of, in addition to Proper Instructions certified copy of a resolution of the Board of Directors or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant 14 Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes. 2.13 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to securities of the Fund held by it and in connection with transfers of securities. 2.14 PROXIES. The Custodian shall, with respect to the securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Fund or a nominee of the Fund, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities. 2.15 COMMUNICATION RELATING TO FUND PORTFOLIO SECURITIES. The Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of securities and expirations of rights in connection therewith and notices of exercise of call options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of the securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any 15 other similar transaction, the Fund shall notify the Custodian at least three business days prior to the date on which the Custodian is to take such action. 2.16 PROPER INSTRUCTIONS. Proper Instructions as used throughout this Article 2 means a writing signed or initialled by one or more person or persons as the Board of Directors shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such Instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Board of Directors of the Fund accompanied by a detailed description of procedures approved by the Board of Directors, Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Board of Directors and the Custodian are satisfied that such procedures afford adequate safeguards for the Fund' s assets. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account In accordance with Section 2.11. 2.17 ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY. The Custodian may in its discretion, without express authority from the Fund: 1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, PROVIDED that all such payments shall be accounted for to the Fund; 16 2) surrender securities in temporary form for securities in definitive form; 3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and 4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Fund except as otherwise directed by the Board of Directors of the Fund. 2.18 EVIDENCE OF AUTHORITY. The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian may receive and accept a certified copy of a vote of the Board of Directors of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Directors pursuant to the Articles of Incorporation as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary. 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE CUSTODIAN The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Directors of the Fund to keep the books of account of the Fund and/or compute the net asset value per share of the outstanding shares of the Fund or, if directed in writing to do so by the Fund, shall Itself keep such books of account ant/or compute such net asset value per share. If s0 directed, the Custodian shall also calculate weekly and the last business day of each month the net income of the Fund as described in the Fund's currently effective prospectus and shall advise the Fund and the Transfer Agent 17 weekly and the last business day of each month of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the weekly and monthly income of the Fund shall be made at the time or times described from time to time in the Fund '8 currently effective prospectus. 4. RECORDS The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to Section 31 thereof and Rules 31a-l and 31a-2 thereunder, applicable federal and state tax laws and any other law or administrative rules or procedures which may be applicable to the Fund. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund ant held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, Include certificate numbers in such tabulations. 5. OPINION OF FUND'S INDEPENDENT ACCOUNTANT The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-2, and Form N-SAR other periodic reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission. 18 6. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS The Custodian shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a Securities System, relating to the services provided by the Custodian under this Contract; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. 7. COMPENSATION OF CUSTODIAN The Custodian shall be entitled to reasonable compensation for its service and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian. 8. RESPONSIBILITY OF CUSTODIAN So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract, but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonable taken or omitted pursuant to such advice. 19 If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to make such action, shall provide indemnity to the Custodian In an amount and form satisfactory to it. If the Fund requires the Custodian to advance cash or securities for any purpose or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of thing Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund assets to the extent necessary to obtain reimbursement. 9. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT This Contract shall become effective as of its execution, shall continue In full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing; PROVIDED, however that the Custodian shall not act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors of the Fund has approved the initial use of a particular Securities System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors has reviewed the use by the Fund of such Securities System, as required in each case by Rule 20 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.10A hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors has approved the initial use of the Direct Paper System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors has reviewed the use by the Fund of the Direct Paper System; PROVIDED FURTHER, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Articles of Incorporation, and further provided, that the Fund may at any time by action of its Board of Directors (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements. 10. SUCCESSOR CUSTODIAN If a successor custodian shall be appointed by the Board of Directors of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System. 21 If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Directors of the Fund, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote. In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Directors shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Directors to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties and obligations of the Custodian shall remain in full force and effect. 11. INTERPRETIVE AND ADDITIONAL PROVISIONS In connection with the operation of this Contract, the Custodian and the Fund may from time to time agree on such provisions Interpretive of or in addition to the provisions of this Contract as may in their joint opinion be 22 consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, PROVIDED that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Articles of Incorporation of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract. 12. ADDITIONAL FUNDS In the event that the Fund establishes an additional series of capital stock other than the Shares with respect to which it desires to have the Custodian render services as Custodian under the terms hereof, it shall so notify the Custodian in writing, and if the Custodian agrees in writing to provide such services, such additional series of Shares shall become a Fund hereunder. 13. MASSACHUSETTS LAW TO APPLY This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of .Massachusetts. 14. PRIOR CONTRACTS This Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets. 15. NOTICES Any notice shall be sufficiently given when sent by overnight, registered or certified mail to the other party at the address of such party set forth above or at such other address a~ such party may from time to time specify in writing to the other party. 23 IN WIINESS WHEREOP, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the 15th day of April, 1988. ATTEST THE HIGH YIELD PLUS FUND. INC. ________________________ By _______________________________ Assistant Secretary President ATTEST STATE STREET BANK AND TRUST COMPANY ________________________ By _________________________________________ Assistant Secretary Vice President 24 EX-99.2(K)(1) 9 Exhibit 2(k)(1) THE HIGH YIELD PLUS FUND, INC. ADMINISTRATION AGREEMENT ADMINISTRATION AGREEMENT, made this 15th day of April, 1998 between THE HIGH YIELD PLUS FUND, INC., a Maryland corporation (the "Fund"), and PRUDENTIAL MUTUAL FUND MANAGEMENT, INC., a Delaware corporation (the "Administration"). W I T N E S S E T H : WHEREAS, the Fund is a diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and WHEREAS, the Fund has retained an investment adviser for the purpose of rendering investment management services and desires to retain the Administrator for certain administrative services, and the Administrator is willing to furnish such administrative services on the terms and conditions hereinafter set forth; NOW, THEREFORE, the parties agree as follows: 1. The Fund hereby appoints the Administrator to provide the services set forth below, subject to the overall supervision of the Board of Directors of the Fund as implemented by the Fund's investment adviser pursuant to the terms of the Investment Advisory Agreement between the Fund and said investment adviser, for the period and on the terms set forth in this Agreement. The Administrator hereby accepts such appointment and agrees during such period to render the services herein described and to assume the obligations set forth herein, for the compensation herein provided. 2. Subject to the supervision of the Board of Directors and officers of the Fund, the Administrator shall provide facilities for meetings of the Board of Directors and shareholders of the Fund and office facilities and personnel to assist the Fund's officers and investment adviser in the performance of the following services: (a) oversee the determination and publication of the Fund's net asset value in accordance with the Fund's policy as adopted from time to time by the Board of Directors; (b) oversee the maintenance of the books and records of the Fund required under Rule 31a-1(b)(4) under the Investment Company Act; (c) arrange for bank or other borrowing by the Fund, pursuant to the investment adviser's determination of the timing, amount and terms of any such borrowing; (d) prepare the Fund's federal, state and local income tax returns; (e) prepare the financial information for the Fund's proxy statements and quarterly and annual reports to shareholders; (f) pre pare the Fund's periodic financial and other reports to the Securities and Exchange Commission; and 2 (g) respond to or refer to the Fund's officers or transfer agent shareholder inquiries relating to the Fund. All services to be furnished by the Administrator under this Agreement may be furnished through the medium of any directors, officers or employees of the Administrator. Each party shall bear all its own expenses incurred in connection with this Agreement. 3. The Fund will pay the Administrator a monthly fee at the annual rate of .20% of the Fund's average net assets, based on the average weekly net asset value. 4. The Administrator assumes no responsibility under this Agreement other than to render the services called for hereunder, and specifically assumes no responsibilities for investment advice or the investment or reinvestment of the Fund's assets. 5. The Administrator shall not be liable for any error of judgment or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of, or from reckless disregard by it of its obligations and duties under, this Agreement. 6. This Agreement shall become effective as of the date first written above and shall thereafter continue in effect unless terminated as herein provided. This Agreement may be terminated by either party hereto (without penalty) at any time upon not less than 60 days; prior written notice to the other party hereto. 3 7. The services of the Administrator to the Fund hereunder are not exclusive and nothing in this Agreement shall limit or restrict the right of the Administrator to engage in any other business or to render services of any kind to any other corporation, firm, individual or association. The administrator shall be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. 8. During the term of this Agreement, the Fund agrees to furnish the Administrator at the principal office of the Administrator prior to use thereof all prospectuses, proxy statements, reports to shareholders, or other material prepared for distribution to shareholders of the Fund or the public that refer in any way to the Administrator, and not to use such material if the Administrator reasonably objects in writing within five business days (or such other time as may be mutually agreed) after receipt thereof, unless prior to such use such material shall have been modified in a manner reasonably satisfactory to the Administrator. In the event of termination of this Agreement, the Fund will continue to furnish to the Administrator copies of any of the above-mentioned materials that refer in any way to the Administrator. The Fund shall furnish or otherwise make available to the Administrator such other information relating to the business affairs of the Fund as the Administrator at any time, or from time to time, reasonably requests in order to discharge its obligations hereunder. 9. This Agreement may be amended by mutual written consent. 10. Any notice or other communication required to be given pursuant to this Agreement shall be deemed duly given if delivered or mailed by registered mail, postage prepaid, (1) to the Administrator at One Seaport Plaza, 18th Floor, New York, New York 10292, or (2) to the Fund at One Seaport Plaza, 4 New York, New York 10292 Attention: President; with a copy of the Fund, c/o Wellington Management Company, 28 State Street, Boston, Massachusetts 02109. 11. This Agreement solely sets forth the agreement and understanding of the parties hereto with respect to the matters covered hereby and the relationship between the Fund and Prudential Mutual Fund Management, Inc. as Administrator. Nothing in this Agreement shall govern, restrict or limit in any way the other business dealings between the parties hereto other than as expressly provided herein. 12. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. THE HIGH YIELD PLUS FUND, INC. By: ---------------------------------------- PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. By: ---------------------------------------- 5 EX-99.2(K)(2) 10 Exhibit 2(k)(2) REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT between THE HIGH YIELD PLUS FUND, INC. and STATE STREET BANK AND TRUST COMPANY TABLE OF CONTENTS PAGE ARTICLE 1 Terms of Appointment; Duties of the Bank.....................1 ARTICLE 2 Fees and Expenses............................................3 ARTICLE 3 Representations and Warranties of the Bank...................3 ARTICLE 4 Representations and Warranties of the Fund...................4 ARTICLE 5 Indemnification..............................................5 ARTICLE 6 Convenants of the Fund and the Bank..........................8 ARTICLE 7 Termination of Agreement.....................................9 ARTICLE 8 Assignment...................................................9 ARTICLE 9 Amendment...................................................10 ARTICLE 10 Massachusetts Law to Apply..................................10 ARTICLE 11 Merger of Agreement.........................................10 REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT AGREEMENT made as of the 15th day of April, 1988, by and between THE HIGH YIELD PLUS FUND, INC., a Maryland corporation, having its principal office and place of business at One Seaport Plaza, New York, New York, 10292, (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its principal office and place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank"). WHEREAS, the Fund desires to appoint the Bank as its registrar, transfer agent, dividend disbursing agent and agent in connection with certain other activities and the Bank desires to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK 1.01 Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to act as registrar, transfer agent for the Fund's authorized and issued shares of its common stock ("Shares"), dividend disbursing agent and agent in connection with any dividend reinvestment plan provided to the Shareholders of the Fund as set out in the prospectus of the Fund, as declared effective by the Securities and Exchange Commission. 1.02 The Bank agrees that it will perform the following services: (a) In accordance with procedures established from time to time by agreement between the Fund and the Bank, the Bank shall: (i) issue and record the appropriate number of Shares as authorized and hold such Shares in the appropriate Shareholder account; (ii) effect transfers of Shares by the registered owners thereof upon receipt of appropriate documentation; (iii) prepare and transmit payments for dividends and distributions declared by the Fund; and (iv) act as agent for Shareholders pursuant to the dividend reinvestment plan as amended from time to time in accordance with the terms of the agreement to be entered into between each Shareholder and the Bank in substantially the form attached as Exhibit A hereto. (v) maintain records of accounts for and advise the Fund and its Shareholders of the foregoing. (b) In addition to and not in lieu of the services set forth in the above paragraph (a), the Bank shall: (i) perform all of the customary services of a registrar, transfer agent, dividend disbursing agent and agent of the dividend reinvestment plan as described in article 1 consistent with those requirements in effect as at the date of this Agreement. The detailed definition, frequency, limitations and associated costs (if any) of such services as set out in the attached fee schedule, include but are not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing, receiving and tabulating proxies and mailing Shareholder reports to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts where applicable, preparing and filing U.S. Treasury Department Forms 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all registered Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders and providing Shareholder account information. -2- ARTICLE 2 FEES AND EXPENSES 2.01 For the performance by the Bank pursuant to this Agreement, the Fund agrees to pay the Bank an annual maintenance fee as set out in the initial fee schedule attached hereto. Such fees and out-of-pocket expenses and advances identified under Section 2.02 below may be changed from time to time subject to mutual written agreement between the Fund and the Bank. 2.02 In addition to the fee paid under Section 2.01 above, the Fund agrees to reimburse the Bank for out-of-pocket expenses or advances incurred by the Bank for the items set out in the fee schedule attached hereto. In addition, any other expenses incurred by the Bank at the request or with the consent of the Fund which are not properly borne by the Bank as part of its duties and obligations under this Agreement, will be reimbursed by the Fund. 2.03 The Fund agrees to pay all fees and reimbursable expenses within five days following the mailing of the respective billing notice. Postage and the cost of materials for mailing of dividends, proxies, Fund reports and other mailings to all Shareholder accounts shall be advanced to the Bank by the Fund at least seven (7) days prior to the mailing date of such materials. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK The Bank represents and warrants to the Fund that: 3.01 It is a trust company duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts. 3.02 It is duly qualified to carry on its business in the Commonwealth of Massachusetts. -3- 3.03 It is empowered under applicable laws and by its charter and by-laws to enter into and perform this Agreement. 3.04 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 3.05 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND The Fund represents and warrants to the Bank that: 4.01 It is a corporation duly organized and existing and in good standing under the laws of Maryland. 4.02 It is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform this Agreement. 4.03 All corporate proceedings required by said Articles of Incorporation and By-Laws have been taken to authorize it to enter into and perform this Agreement. 4.04 It is a closed-end, diversified investment company registered under the Investment Company Act of 1940. 4.05 A registration statement under the Securities Act of 1933 is currently effective and appropriate state securities law filings have been made with respect to all Shares of the Fund being offered for sale; information to the contrary will result in immediate notification to the Bank. 4.06 It shall make all required filings under federal and state securities laws. -4- ARTICLE 5 INDEMNIFICATION 5.01 The Bank shall not be responsible for, and the Fund shall indemnify and hold the Bank harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of the Bank or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct. (b) The Fund's refusal or failure to comply with the terms of this Agreement, or which arise out of the Fund's lack of good faith, negligence or willful misconduct or which arise out of the breach of any representation or warranty of the Fund hereunder. (c) The reliance on or use by the Bank or its agents or subcontractors of information, records and documents which (i) are received by the Bank or its agents or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have been prepared and/or maintained by the Fund or any other person or firm on behalf of the Fund. Such other person or firm shall include any former transfer agent or former registrar, or co-transfer agent or co-registrar. (d) The reliance on, or the carrying out by the Bank or its agents or subcontractors of any written instructions or requests of the Fund's representative. "Written instructions" means written instructions delivered by mail, tested telegram cable, telex or facsimile sending device and received by the Bank or its agents or subcontractors, signed by authorized persons. (e) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of -5- any state that such Shares be registered in such state or in violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of such Shares in such state. 5.02 The Bank shall indemnify and hold the Fund harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to any action or failure or omission to act by the Bank as a result of the Bank's lack of good faith, negligence or willful misconduct or of any of its agents or subcontractors or which arise out of the breach of any representation or warranty hereunder. 5.03 At any time the Bank may apply to any officer of the Fund for instructions, and may consult with experienced securities counsel with respect to any matter arising in connection with the services to be performed by the Bank under this Agreement, and the Bank and its agents or subcontractors shall not be liable and shall be indemnified by the Fund for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel that such actions or omissions comply with all applicable law. The Bank, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Fund, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instructions, information, data, records or documents provided the Bank or its agents or subcontractors by telephone, in person, machine readable input, telex, CRT data entry or other similar means authorized by the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Fund. The Bank, its agents and subcontractors shall also be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or -6- facsimile signatures of the officers of the Fund, and the proper countersignature of any former transfer agent or former registrar, or of a co-transfer agent or co-registrar. 5.04 In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. In addition, the Bank shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provision for emergency use of electronic data processing equipment to the extent appropriate equipment is available and the Bank shall further use reasonable care to minimize the likelihood of such damage, loss of data, delays and/or errors and should such damage, loss of data, delays and/or errors occur, the Bank shall use its best efforts to mitigate the effects of such occurrence. 5.05 Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any act or failure to act hereunder. 5.06 In order that the indemnification provisions contained in this Article 5 shall apply, upon the assertion of a claim or the institution of any agency action or investigation for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party seeking indemnification shall promptly notify the other party of such assertion, and shall kept he other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party -7- may be required to indemnify it except with the other party's prior written consent. ARTICLE 6 CONVENANTS OF THE FUND AND THE BANK 6.01 The Fund shall promptly furnish to the Bank the following: (a) A certified copy of the resolution of the Board of Directors of the Fund authorizing the appointment of the Bank and the execution and delivery of this Agreement. (b) A copy of the Articles of Incorporation and By-Laws of the Fund and all amendments thereto. 6.02 The Bank hereby agrees to establish and maintain facilities and procedures reasonable acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. 6.03 The Bank shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the Rules thereunder, the Bank agrees that all such records prepared or maintained by the Bank relating to the services to be performed by the Bank hereunder are the property of the Fund and will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Fund on and in accordance with its request. 6.04 The Bank and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiations or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except as may be required by law. -8- 6.05 In case of any requests or demands for the inspection of the Shareholder records of the Fund, the Bank will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. The Bank reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person. ARTICLE 7 TERMINATION OF AGREEMENT 7.01 This Agreement may be terminated by either party upon one hundred twenty (120) days written notice to the other. Any such termination shall not affect the rights and obligations of the parties under Article 5 hereof. 7.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and material will be borne by the Fund. Additionally, the Bank reserves the right to charge for any other reasonable expenses associated with such termination and/or a charge equivalent to the average of three (3) month's fees. In the event that the Fund designates a successor to any of the Bank's obligations hereunder, the Bank shall at the expense and direction of the Fund, transfer to such successor a certified list of the Shareholder of the Fund, a complete record of the account of each Shareholder, and all other relevant books, records and other data established or maintained by the Bank hereunder. ARTICLE 8 ASSIGNMENT 8.01 Except as provided in Section 8.03 below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party. 8.02 This Agreement shall insure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. -9- 8.03 The Bank may, without further consent on the part of the Fund, subcontract for the performance hereof with (i) Boston Financial Data Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section 17A(c)(1)"), (ii) a BFDS subsidiary duly registered as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS affiliate; provided, however, that the Bank shall be as fully responsible to the Fund for the acts and omissions of any subcontractor as it is for its own acts and omissions. ARTICLE 9 AMENDMENT 9.01 This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Directors of the Fund. 9.02 In the event the Fund issues additional series of capital stock in addition to the Shares with respect to which it desires to have the Bank render services as transfer agent, dividend disbursing agent and agent under the terms hereof, it shall so notify the Bank in writing, and if the Bank agrees in writing to provide such services, such additional series of Shares shall become a Fund hereunder. ARTICLE 10 MASSACHUSETTS LAW TO APPLY 10.01 This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts. ARTICLE 11 MERGER OF AGREEMENT 11.01 This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject hereof whether oral or written. -10- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers, as of the day and year first above written. THE HIGH YIELD FUND, INC. BY: ------------------------------------- ATTEST: STATE STREET BANK AND TRUST COMPANY BY: ------------------------------------- Vice President ATTEST: - --------------------------- Assistant Secretary -11- STATE STREET BANK AND TRUST COMPANY REGISTRAR AND TRANSFER AGENT'S CERTIFICATE THE HIGH YIELD PLUS FUND, INC. STATE STREET BANK AND TRUST COMPANY, Boston, Massachusetts ("State Street") certifies as follows: 1. State Street is the duly appointed Registrar and Transfer Agent for the Common Stock, par value $.01, of The High Yield Plus Fund, Inc. (the "Fund"). 2. Certificates for 10,750,000 shares of said Common Stock duly countersigned by State Street as Transfer Agent and as Registrar, and duly issued in the names and denominations specified by Prudential-Bache Securities Inc. as Representative of the several underwriters have been delivered on the date of this certificate pursuant to the directions from Prudential-Bache Securities Inc. to the undersigned. 3. All of said certificates bear the facsimile signatures of the President and Secretary of the Fund and the facsimile of its corporate seal, and have been duly countersigned on behalf of State Street, by individuals authorized to do so, each of whom at the time of affixing his signature was and still is duly authorized to sign such certificates by the Board of Directors of State Street. 4. As of the close of business on April 21, 1988, the total number of issued and outstanding shares of Common Stock, par value $.01 per share, of the Fund is 11,000. IN WITNESS WHEREOF, STATE STREET BANK AND TRUST COMPANY has caused this certificate to be executed in its corporate name by an officer thereunto duly authorized and its corporate seal to be affixed hereto this 22nd day of April, 1988. STATE STREET BANK AND TRUST COMPANY By: ----------------------------------- James F. Turner Vice President EX-99.2(K)(3) 11 Exhibit 2(k)(3) CREDIT AGREEMENT CREDIT AGREEMENT, dated as of October 31, 1993, by and between THE HIGH YIELD PLUS FUND, INC , a management investment company with its principal office at One Seaport Plaza, New York, New York 10292 (hereinafter referred to as the "Borrower"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association with its head office at 100 Federal Street, Boston, Massachusetts 02110 (the "Bank"). WHEREAS, the Borrower is authorized to borrow money to leverage its investment portfolio, and desires to enter into this Agreement so that it may borrow funds from the Bank from to time for such purpose; and WHERAS, the Bank is willing to advance funds to the Borrower from time to time on the terms and subject to the conditions set forth below; NOW, THREFORE, in consideration of the mutual promises and agreements of the parties set forth herein, the parties hereto agree as follows: Section 1. DEFINITIONS; INTERPREATION. Section 1.1 DEFINITIONS. As used herein, the following terms shall have meanings assigned to them below: ADJUSTED EURODOLLAR RATE. Applicable to any Interest Period, shall mean a rate per annum determined pursuant to Section i. DEAINITIONS; INTERPRETATION. Section 1.1. DEFINITIONS. As used herein, the following terms shall have meanings assigned to them below: ADJUSTED EURODOLLAR Rate. Applicable to any Interest Period, shall mean a rate per annum determined pursuant to the following formula: AER = [ IOR ]* [ 1.00 - RP ] AER = Adjusted Eurodollar Rate IOR = Interbank Offered Rate RP = Reserve Percentage *The amount in brackets shall be rounded upwards, if necessary, to the next higher 1/100 of 1%. Where: "Interbank Offered Rate" applicable to any Eurodollar Loan for any Interest Period means the rate of interest determined by the Bank to be the prevailing rate per annum at which deposits in U.S. dollars are offered to the Bank by first-class banks in the Interbank Eurodollar market in which it regularly participates on or about 10:00 a.m. (Boston time) two business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Eurodollar Loan to which such Interest Period is to apply for a period of time approximately equal to such Interest Period. "Reserve Percentage" applicable to any Interest Period means the rate (expressed as a decimal) applicable to the Bank during such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency or marginal reserve requirement) of the Bank with respect to "Eurocurrency liabilities" as that term is defined udner such regulations. The adjusted Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Reserve Percentage. AFFECTED LOANS. See Section 2.10(a). AFFILIATED PERSON. As defined in the 1940 Act and the rules and regulations promulgated thereunder. AGREEMENT. This Credit Agreement as originally executed, or if amended or supplemented from time to time, as so amended or supplemented. References to the Agreement shall mean and include references to each of the Exhibits and Schedules hereto. BANK. As defined in the preamble hereof. BASE RATE. The greater of (i) the annual rate of interest announced from time to time by the Bank at its Head Office as its "Base Rate", and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/8 of 1%). BASE RATE LOAN. A Loan that bears interest at the Base Rate. BORROWER. As defined in the preamble hereof. BORROWING DATE. The date on which any Loan is made or is to be made hereunder. BUSINESS DAY. (i) For all purposes other than as covered by clause (ii) below, any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts or New York, New York are open for the conduct of a substantial part of their commercial banking business; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day that is a Business Day described in 2 clause (i) and that is also a day for trading by and between banks in U.S. Dollar deposits in the interbank Eurodollar market. COMMITMENT AMOUNT. The maximum amount of the Bank's commitment make Loans to the Borrower, which initially shall be $30,000,000, as the same may be reduced from time to time pursuant to Section 2.4 hereof or terminate pursuant to Section 2.4 or Section 6.1 hereof. COMMITMENT EXPIRY DATE. As defined in Section 2.4(d) hereof. COMMITMENT FEE. As defined in Section 2.6 hereof. CUSTODIAN. The entity that acts as the Borrower's custodian for purposes of Section 17(f) of the 1940 Act. DEFAULT. As defined in Section 6.1 hereof. EURODOLLAR LOAN. Any Loan bearing interest at a rate determined with reference to the Adjusted Eurodollar Rate. EVENT OF DEFAULT. As defined in Section 6.1 hereof. FEDERAL FUNDS EFFECTIVE RATE. For any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Bank from three Federal Funds brokers of recognized standing selected by the Bank. HEAD OFFICE. The head office of the Bank, which at present is located at 100 Federal Street, Boston, Massachusetts 02110. INTEREST PERIOD. (a) With respect to each Eurodollar Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Loan and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Loan Request delivered pursuant to Section 2.2(a), or continuation notice delivered pursuant to Section 2.7(b); and (b) With respect to each Money Market Loan, the period commencing on the date of the making of such Money Market Loan and ending one to 180 days thereafter, as the Borrower may elect in the applicable Loan Request delivered pursuant to Section 2.2(a), or continuation notice delivered pursuant to Section 2.7(b); PROVIDED that 3 (i) any Interest Period (other than an Interest Period determined pursuant to clause (iii) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans, such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period applicable to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Commitment Expiry Date shall end on the Commitment Expiry Date; and (iv) notwithstanding clause (iii) above, no Interest Period applicable to a Eurodollar Loan shall have a duration of less than one month; and if any Interest Period applicable to such Loan would be for a shorter period, such Interest Period shall not be available hereunder. LOAN or LOANS. Singly, any of, and collectively, all of, the Loans. LOAN ACCOUNT. As defined in Section 2.3 hereof. LOAN REQUEST. As defined in Section 2.2(a) hereof. MAXIMUM AMOUNT. With respect to the Borrower, and at the relevant time of reference thereto, an amount equal to the lesser of the following: (i) until the Commitment Expiry Date, the Commitment Amount, or (ii) at all times, and when added to all other indebtedness of the Borrower then outstanding, 33-1/3% of the value of the total assets of the Borrower at such time, or (iii) the maximum amount the Borrower is permitted to borrow at such time under (a) applicable federal or state laws, statutes and regulations, including without limitation the asset coverage requirements of Section 18(a)(1) of the 1940 Act, (b) agreements (whether or not having the force of law) by the Borrower with federal, state, local or foreign governmental agencies, authorities or regulators, as more particularly described in Part 1 of SCHEDULE I hereto, as amended and in effect from time to time, and (c) limitations on borrowing adopted by the Borrower and described in its Registration Statement or elsewhere, as more particularly described in Part 2 of SCHEDULE I hereto, as amended and in effect from time to time. MONEY MARKET LOANS. Loans bearing interest at a Money Market Rate. MONEY MARKET RATE. The rate quoted by the Bank in its sole discretion (it being understood that the Bank is under no obligation to quote such rate) to the Borrower as the fixed rate of interest at which it is willing to make a 4 "money market" loan to the Borrower in the amount and for the Interest Period to be applicable to the requested Loan. 1940 ACT. The Investment Company Act of 1940, as amended. PROSPECTUS. The Borrower's Prospectus dated April 15, 1988. REGISTRATION STATEMENT. The Registration Statement on Form N-2 filed by the Borrower with the Securities and Exchange Commission and amended as required, pursuant to the 1940 Act. REGULATION U. Regulation U promulgated by the Board of Governors of the Federal Reserve System, as in effect from time to time. Section 1.2. INTERPRETATION. All terms of an accounting character not specifically defined herein shall have the meanings assigned thereto by generally accepted accounting principles in the United States ofd America, unless the context otherwise requires. Each reference herein to a particular person or entity (including, without limitation, the Bank) shall include a reference to the successors and permitted assigns of such person or entity. The words "herein", "hereof", "hereunder", and words of like import shall refer to this Agreement as a whole and not to any particular Section or subdivision of this Agreement. Section 2. CREDIT FACILITY. Section 2.1. COMMITMENT TO LEND. Subject to the terms and conditions set forth in this Agreement, the Bank agrees to make revolving loans ("LOANS") to the Borrower from time to time on any Business Day during the period from the date hereof to (but not including) the Commitment Expiry Date, as may be requested by the Borrower. Each Loan made by the Bank shall be in the principal amount stated in the applicable Loan Request, and shall be in a minimum amount of at least $1,000,000 and an integral multiple of $500,000 (or the balance of the unborrowed Commitment Amount), PROVIDED that at no time shall the aggregate outstanding principal amount of all Loans exceed the Commitment Amount; and PROVIDED, FURTHER that at no time shall the aggregate outstanding principal amount of all Loans exceed the Maximum Amount. Within the limits of the provisions of this Section 2.1, the Borrower may borrow, pay or prepay pursuant to Section 2.9 and (subject to availability, in the case of Money Market Loans) reborrow under this Section 2.1. Section 2.2. NOTICE AND MANNER OF BORROWING. All Loans shall be requested and funded in accordance with the procedures set forth below: (a) LOAN REQUESTS. Each request by the Borrower for a Loan hereunder shall be made by telephonic notice to the Bank (a "LOAN REQUEST") prior to 11:30 a.m., Boston time, on the Borrowing Date in the case of Base Rate Loans and Money Market Loans, and three days prior to the Borrowing Date in the case of Eurodollar Loans. Each Loan Request shall be irrevocable and shall state (i) the principal amount of the requested Loan, (ii) the interest rate to be applicable thereto, and (iii) in the case of Eurodollar Loans and Money Market Loans, the Interest Period requested for such Loan (subject to the definition of Interest Period). Each Loan request shall also state the maximum amount the Borrower is 5 then permitted to borrow hereunder, determined in accordance with the definition of Maximum Amount. Each Loan Request shall be made by a duly authorized representative of the Borrower, as specified by the Borrower in writing from time to time, and the Bank may rely upon any telephone request that it reasonably believes is made by such a representative. Each Loan Request shall promptly be followed by a written confirmation thereof, substantially in the form of EXHIBIT A hereto, PROVIDED that if such written confirmation differs in any material respect from the action of the Bank taken in good faith reliance upon such telephone request, the records of the Bank shall control absent manifest error. Each Loan Request made by the Borrower shall constitute a representation and warranty by the Borrower to the Bank that (i) the Loan requested thereby is permitted under the Borrower's Registration Statement; (ii) such Loan will not, when made, cause the aggregate outstanding principal amount of all Loans of the Borrower hereunder to exceed the Maximum Amount then in effect; (iii) the proceeds of such Loan will be used by the Borrower only in accordance with the provisions of Section 2.13 hereof, and (iv) all of the representations and warranties of the Borrower contained in Section 4 hereof are true and correct on and as of the date of such Loan Request and the date of such Loan as though made on and as of such dates. (b) FUNDING THE LOANS. The Bank shall make each Loan hereunder by depositing or wiring the proceeds thereof, on the same day in immediately available funds and at the Borrower's expense, to an account maintained on the Borrower's behalf by its Custodian in accordance with the wiring instructions set forth in SCHEDULE II hereto, as amended by the Borrower and in effect from time to time. Section 2.3. LOAN ACCOUNT. The Bank will maintain a separate account on its books for the Borrower (the "LOAN ACCOUNT") on which will be recorded, in accordance with the Bank's customary accounting practice, (a) all Loans made by the Bank to the Borrower, (b) all payments of such Loans made to the Bank, and (c) all other charges and expenses properly chargeable to the Borrower hereunder. The debit balance of the Loan Account shall reflect the amount of the Borrower's indebtedness from time to time to the Bank hereunder and, in the absence of manifest error, constitute conclusive evidence of the indebtedness of the Borrower to the Bank hereunder. Section 2.4. REDUCTION OF TERMINATION OF COMMITMENT AMOUNT. (a) Unless terminated earlier pursuant to the provisions of paragraphs (b) or (c) of this Section 2.4, the Bank's commitment to make Loans hereunder shall be in effect from the date of this Agreement through October 30, 1994. (b) Subject to Section 2.12 hereof, the Borrower may (i) at any time terminate this Agreement by giving written notice thereof to the Bank and repaying in full all obligations of the Borrower hereunder; or (ii) at any time on or prior to the Commitment Expiry Date, reduce the Commitment Amount in part in integral multiples of $1,000,000 by giving 30 Business Day's prior written notice thereof to the Bank and repaying the amount, if any, by which the aggregate unpaid principal amount of the Loans exceeds the then reduced Commitment Amount. Any such termination or reduction shall be accompanied by the payment of the Commitment Fee accrued to the date of such termination or reduction. Any such termination or reduction may be effected by the Borrower 6 without penalty. No termination or reduction of the Commitment Amount shall be subject to reinstatement. (c) Upon the occurrence of an Event of Default (unless waived pursuant to Section 16 hereof), the Bank may terminate its commitment to make Loans hereunder by written notice to the Borrower, except a such written notice is not required by Section 6.1 hereof. (d) The date on which the Bank's commitment to make Loans hereunder terminates or is terminated pursuant to this Section 2.4 is sometimes herein referred to as the "COMMITMENT EXPIRY DATE." Section 2.5. REPAYMENT OF LOANS. Each Base Rate Loan shall mature and the principal amount thereof become due and payable in full on the Commitment Expiry Date. Each Eurodollar Loan or Money Market Loan shall mature and the principal amount thereof become due and payable on the last day of the applicable Interest Period. Section 2.6. COMMITMENT FEE. The Borrower agrees to pay to the Bank, for the period commencing on the date this Agreement is executed by the Bank and the Borrower and ending on the Commitment Expiry Date, a commitment fee (the "COMMITMENT FEE") computed at the rate of one quarter of one percent (1/4%) per annum of the average daily unused Commitment Amount, payable quarterly in arrears on the last day of each March, June, September and December and on the Commitment Expiry Date. Section 2.7. INTEREST. (a) INTEREST RATE ON LOANS. Except as otherwise provided in Section 2.7(d) below, the outstanding principal amount of each loan shall bear interest until maturity at (i) the Base Rate, (ii) the Adjusted Eurodollar Rate plus 1.0%, or (iii) the applicable Money Market Rate, as selected by the Borrower from time to time in its Loan Request. Interest accrued on each Base Rate Loan shall be paid by the Borrower on the last day of each calendar quarter and at the maturity of such loan (whether at stated maturity, by acceleration or otherwise). Interest accrued on each Eurodollar Loan and Money Market Loan shall be paid on the last day of the Interest Period applicable thereto (and if such Interest Period is greater than three months, on the date occurring three months from the first day of such Interest Period) and at the maturity of such Loan (whether at stated maturity, by acceleration or otherwise). (b) DURATION OF INTEREST PERIODS. Subject to the provisions of the definition of Interest Period, the duration of each Interest Period applicable to a Eurodollar Loan or Money Market Loan shall be as specified in the applicable Loan Request delivered pursuant to Section 2.2(a). The Borrower shall have the option to elect a subsequent Interest Period to be applicable to a Eurodollar Loan or Money Market Loan by giving notice of such election to the Bank received no later than 10:00 a.m. Boston time on the last day of the then applicable Interest Period if such Loan is to be continued as or converted to a Money Market Rate Loan and three Business Days before the end of the then applicable Interest Period if such Loan is to be continued as or converted to a Eurodollar Loan. 7 If the Bank does not receive a notice of election of duration of an Interest Period for a Eurodollar Loan or Money Market Loan within the applicable time limits specified therein, or if the Borrower shall have requested a Money Market Loan and such Loans shall not then be available, or if, when such notice must be given, a Default or Event of Default then exists, the Borrower shall be deemed to have elected to convert such Loan in whole into a Base Rate Loan on the last day of the then current Interest Period with respect thereto. Notwithstanding the foregoing, the Borrower may not select an Interest Period that would end, but for the provisions of the definition of Interest Period, after the Commitment Expiry Date. (c) OVERDUE PRINCIPAL AND INTEREST. Overdue principal and (to the extent permitted by applicable law) interest on each Loan and all other overdue amounts payable hereunder shall bear interest compounded monthly and payable on demand at a rate per annum equal to two percent above the greater of (i) the interest rate then in effect for such loan and (ii) the Base Rate, until such amount shall be paid in full (whether before or after judgment). (d) LIMITATION ON INTEREST. No provision of this Agreement shall require the payment or permit the collection of interest in excess of the rate then permitted by applicable law. Section 2.8. PLACE AND MODE OF PAYMENTS; COMPUTATIONS. (a) Each payment made or caused to be made by the Borrower to the Bank under this Agreement shall be made directly to the Bank in United States Dollars at the Bank's Head Office ABA #011-000-390 Attention: Loretta Barrasso, Commercial Loan Services, not later than 2:00 p.m., Boston time, on the due date of each such payment, and in immediately available and freely transferable funds. (b) If any sum would, but for the provisions of this subsection (b), become due and payable to the Bank by the Borrower on any day that is not a Business Day, then such sum shall become due and payable on the next succeeding Business Day, and interest payable to the Bank under this Agreement shall be adjusted by the Bank accordingly. (c) All computations of interest and fees hereunder shall be made by the Bank on the basis of a 360-day year and paid for the actual number of days elapsed. (d) The Bank will determine the Base Rate in effect from time to time. Any change in the Base Rate shall, for all purposes of this Agreement, become effective on, and from the beginning of, the day on which such change shall first be announced or determined by the Bank in accordance with the Bank's customary banking practices. (e) Each payment by the Borrower under this Agreement shall be made without set-off or counterclaim and free and clear of and without deduction or withholding of any kind. Section 2.9. OPTIONAL PREPAYMENTS; CERTAIN MANDATORY PREPAYMENTS. (a) The Borrower shall have the right at any time to repay any Base Rate Loans, in whole or in part, upon telephonic notice to the Bank of its intention 8 to repay such Loan prior to 12:00 noon, Boston time, on the date such prepayment is to be made; PROVIDED, HOWEVER, that each such prepayment (except a prepayment in full) shall be made in an amount of $100,000 or an integral multiple thereof. Except as otherwise provided herein, Eurodollar Loans may only be prepaid on the last day of the applicable Interest Period, No Money Market Loans may be voluntarily prepaid. (b) Upon any reduction of the Commitment Amount pursuant to Section 2.4(b) hereof or otherwise, or if at any time the aggregate unpaid principal amount of Loans exceeds the Commitment Amount, the Borrower agrees to immediately prepay the amount of such excess, together with any amounts payable pursuant to Section 2.12 hereof. (c) If at any time the aggregate unpaid principal amount of Loans shall exceed the Maximum Amount, the Borrower shall immediately prepay the amount of such excess, together with any amounts payable pursuant to Section 2.12 hereof. (d) Upon each repayment or prepayment of any principal of any Loan pursuant to any of the provisions of this Agreement, the Borrower hereby absolutely and unconditionally promises to pay to the Bank, and there shall become absolutely due and payable on the date of each such repayment or prepayment, all of the unpaid interest accrued to such date on the amount of the principal of the Loan being repaid or prepaid on such date. Whenever any interest on and any principal of the Loans are paid simultaneously hereunder, the whole amount paid shall be applied first to interest then due and payable. 2.10. CHANGED CIRCUMSTANCES. (a) In the event that: (i) on any date on which the Adjusted Eurodollar Rate would otherwise be set the Bank shall have determined in good faith (which determination shall be final and conclusive) that adequate and fair means do not exist for ascertaining the Interbank Offered Rate, or (ii) at any time the Bank shall have determined in good faith (which determination shall be final and conclusive) that: (A) the making or continuation of or conversion of any Loan to a Eurodollar Loan has been made impracticable or unlawful by (1) the occurrence of a contingency that materially and adversely affects the interbank Eurodollar market or (2) compliance by the Bank in good faith with any applicable law or governmental regulation, guideline or order or interpretation or change thereof by any governmental authority charged with the interpretation or administration thereof or with any request or directive of any such governmental authority (whether or not having the force of law); or (B) the Adjusted Eurodollar Rate shall no longer represent the effective cost to the Bank for U.S. dollar deposits in the interbank market for deposits in which it regularly participates; 9 then, in any such event, the Bank shall forthwith so notify the Borrower thereof. Until the Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the obligation of the Bank to allow selection by the Borrower of the type of Loan affected by the contingencies described in this Section 2.10(a) (herein called "AFFECTED LOANS") shall be suspended. If at the time the Bank so notifies the Borrower, the Borrower has previously given the Bank a Loan Request with respect to one or more Affected Loans but such Loans have not yet gone into effect, such Loan Request shall be deemed to be void and the Borrower may borrow Loans of a non-affected type by delivering a substitute Loan Request pursuant to Section 2.2(a) hereof. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the Borrower shall, with respect to the outstanding Affected Loans, prepay the same, together with interest thereon and any amounts required to be paid pursuant to Section 2.12, and may borrow a Loan of another type in accordance with Section 2.1 hereof by delivering a substitute Loan Request pursuant to Section 2.2(a) hereof. (b) In case any change in law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (i) subjects the Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by the Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of the Bank imposed by the United States of America or any political subdivision thereof), or (ii) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, the Bank (other than such requirements as are already included in the determination of the Adjusted Eurodollar Rate), or (iii) imposes upon the Bank any other condition with respect to its performance under this Agreement. and the result of any of the foregoing is to increase the cost to the Bank, reduce the income receivable by the Bank or impose any expense upon the Bank with respect to any Loans, the Bank shall notify the Borrower thereof. The Borrower agrees to pay to the Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by the Bank of a statement in the amount and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. Section 2.11. INCREASED CAPITAL REQUIREMENTS. If any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) or the interpretation thereof by a court or governmental authority with appropriate jurisdiction affects the amount of capital required to be maintained by the Bank or any corporation controlling the 10 Bank and the Bank determines that the amount of capital required is increased by or based upon the existence of the credit facilities established hereunder or any Loans made pursuant hereto, and such increase has or would have the effect of reducing the return on the Bank's equity to a level below that which the could have achieved (taking into consideration the Bank's then existing policies with respect to capital adequacy and assuming the full utilization of the Bank's capital) but for such law, rule, regulation, policy, guideline or directive, then the Bank shall notify the Borrower in writing of such fact. The Borrower agrees to pay the amount of such reduction as and when such reduction is determined, upon presentation by the Bank in the amount and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. In determining such amount, the Bank may use any reasonable averaging and attribution methods. In this connection, the Bank shall allocate such costs among its customers in good faith and on an equitable basis. Section 2.12. FUNDING LOSSES. If the Borrower for any reason makes any payment of principal with respect to a Eurodollar Loan or Money Market Loan on any date other than the scheduled maturity thereof, or fails to borrow or continue a Eurodollar Loan or a Money Market Loan after giving a Loan Request or continuation notice therefor, the Borrower shall reimburse the Bank for any resulting loss or expense incurred by it, including without limitation any loss reasonably incurred in obtaining, liquidating or employing of deposits from third parties. The Borrower shall pay the amount of such loss or expense upon presentation of a statement in the amount thereof and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. Section 2.13. USE OF PROCEEDS. The proceeds of each Loan hereunder shall be used to leverage the Borrower's investment portfolio in accordance with the Registration Statement and applicable law and regulation. No portion of any Loan is to be used for the "purpose of purchasing or carrying" any "margin stock" in violation of the requirements set forth in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. 221 and 224, as amended. After applying the proceeds of the Loans hereunder, not more than 25% of the value of the assets of the Borrower that are subject to the provisions of Section 5.11 hereof will be represented by "margin stock". Section 3. CONDITIONS PRECEDENT. Section 3.1. CONDITIONS OF CLOSING. This Agreement shall become effective upon the receipt by the Bank of the following: (a) executed original counterparts of this Agreement, signed by each of the Bank and the Borrower; (b) certified copies of the Articles of Incorporation and bylaws of the Borrower; (c) certified copies of all documents relating to the due authorization and execution by the Borrower of this Agreement as the Bank may reasonably request, including, without limitation, all votes of the Board of Directors of the Borrower authorizing (i) the execution and delivery by the Borrower of this Agreement, (ii) its performance of all of its agreements and obligations under 11 this Agreement, and (iii) the borrowings and other transactions contemplated by this Agreement; (d) an incumbency certificate, dated the date hereof, signed by the Secretary or Assistant Secretary of the Borrower setting forth the names and specimen signatures of each individual authorized to give notices, sign or act on behalf of the Borrower in connection with the transactions contemplated by this Agreement; (e) an opinion from Kirkpatrick & Lockhart, counsel to the Borrower, substantially in the form of EXHIBIT B attached hereto; and (f) such other documents as the bank shall have requested in order to comply with applicable rules and regulations promulgated by the Federal Reserve Board and other governmental and regulatory authorities. Section 3.2 CONDITIONS OF LOANS. The willingness of the Bank to make any Loan on a Borrowing Date shall be subject tot he satisfaction, at or before the time each such Loan is made, of the following conditions precedent (unless and to the extent that satisfaction of such conditions precedent or any of them is waived pursuant to Section 16 hereof): (a) The Bank shall have received a Loan Request from the Borrower as required by Section 2.2(a); (b) The representations and warranties contained in Section 4 of this Agreement and otherwise made by or on behalf of or with respect to the Borrower in connection with the transactions contemplated by this Agreement shall (except to the extent that such representations and warranties relate expressly to a specific date, and except tot he extent of changes resulting from the transactions contemplated or permitted by this Agreement and changes occurring in the ordinary course of business that, singly or in the aggregate, do not materially adversely affect the Borrower or its business, assets, operations, prospects or its condition (financial or otherwise)), be true and correct at and as of such Borrowing Date; (c) There shall exist no Default or Event of Default upon the making of such Loan; (d) The Bank shall be satisfied that there has been no material adverse change in the business, assets, operations, prospects or condition (financial or otherwise) of the Borrower since March 31, 1993; and (e) The making of such Loan shall not contravene any law, regulation, decree or order biding on the Borrower or the Bank, and the Bank shall have received all such certificates and documents in relation thereto as the Bank or the Bank's counsel shall have reasonably requested. Section 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Bank that: Section 4.1. ORGANIZATION, QUALIFICATION, ETC. The Borrower is duly organized and validly existing as a corporation under the laws of the State of Maryland and is duly qualified to do business in each other jurisdiction wherein 12 the nature of its properties or its business requires such qualification and in which the failure to be so qualified could materially adversely affect the business, assets or condition (financial or otherwise) of the Borrower. Section 4.2. REGISTRATION UNDER 1940 ACT. The Borrower is registered as a closed-end management investment company under the 1940 Act. Section 4.3. AUTHORIZATION, ETC. The execution, delivery and performance by the Borrower of this Agreement are within the powers of the Borrower, have been duly authorized by all necessary and proper action on the part of the Borrower, and do not and will not (i) violate or contravene any provision of the Borrower's Articles of Incorporation or bylaws, or any amendment thereof, (ii) violate or contravene any provision of the Borrower's Prospectus or Registration Statement, (iii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of the property or assets of the Borrower under, any agreement, trust deed, indenture, mortgage or other instrument to which the Borrower is a party or by which the Borrower or any of its property or assets is bound or affected, or (iv) violate or contravene any provision or any material law, regulation, order, ruling or interpretation thereunder or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official. Section 4.4. BINDING EFFECT OF AGREEMENT, ETC. This Agreement and all the provisions hereof constitute the legally valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. Section 4.5. APPROVALS, ETC. No authorization, approval, consent or other action by, and no action to or filing with, any shareholder or creditor of the Borrower, or governmental or regulatory agency or authority, is required to make valid and legally binding the execution, delivery and performance by the Borrower of this Agreement or the consummation by the Borrower of the transactions contemplated hereby, or the exercise by the Bank of its rights and remedies hereunder. Section 4.6. COMPLIANCE WITH OTHER INSTRUMENTS. The Borrower is in compliance with all investment policies and restrictions identified in its Prospectus and Registration Statement and is in compliance with all investment policies and Statement and is in compliance with all investment policies and restrictions applicable to it under Section 8(b). Section 13 and all other provisions of the 1940 Act. The Borrower is not in violation of any material provision of its Articles of Incorporation or bylaws, or any amendment thereof, or in default under any material indenture or agreement to which it is a party or by which it or any of its property or assets is bound, or in violation of any material applicable laws or orders, regulations, rulings, decrees or requirements of any court or governmental or regulatory agency or authority by which it or any of its property or assets is bound, which default or violation 13 could have a material adverse effect on the business, assets, operations, prospectus or condition (financial or otherwise) of the Borrower. Section 4.7. LITIGATION. There are no pending or, to the best knowledge of the Borrower, threatened actions, suits, investigations or proceedings at law or in equity before any federal, state, local or foreign court, governmental or regulatory authority, agency, commission, board, bureau or instrumentality, or board of arbitration, against or affecting the Borrower or its right, title and interest in or to any of its properties or assets. Section 4.8. TAXES. The Borrower has made or filed all federal, state, local, foreign and other tax returns, reports and declarations required by any jurisdiction to which the Borrower is subject, and has paid all taxes and other assessments and charges shown or determined to be due on such returns, reports and declarations or pursuant to any matters raised by audits or for other reasons known to it, except those being contested in good faith by appropriate proceedings and as to which there have been set aside reserves adequate with respect to such tax, assessment or charge so contested. The Borrower has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes claimed to be due by the taxing authority of any jurisdiction, and the Borrower knows of no basis for any such claim. Section 4.9. FINANCIAL STATEMENTS; NO MATERIAL CHANGES. The Annual Report of the Borrower as of March 31, 1993, setting forth the Portfolio of Investments of the Borrower and a Statement of Assets and Liabilities as of the date of such Report, and Statement of Operations, Cash Flows and Changes in Net Assets of the Borrower for the period then ended, certified by Deloitte & Touche, and the Quarterly Report of the Borrower as of June 30, 1993, setting forth the Portfolio of Investments of the Borrower as of the date of such report, certified by management of the Borrower, copies of each f which have been furnished to the Bank, are complete and correct; and said Annual Report fairly presents the financial condition of the Borrower as of its date and the results of the operations of the Borrower for the period ended on such date, all in accordance with generally accepted accounting principles applied on a consistent basis. Since March 31, 1993, there has been no change in the assets, liabilities, business, condition (financial or otherwise) or results of operations of the Borrower, that have been, in any case or in the aggregate, materially adverse. Section 4.10. NO DEFAULTS. No Default or Event of Default has occurred and is continuing. Section 4.11. AFFILIATED PERSONS. (a) So far as appears from the records of the Borrower, neither the Bank nor, to the knowledge of the Borrower, any Affiliated Person of the Bank, individually or in the aggregate, owns, controls or holds with the power to vote, five percent or more of the outstanding voting securities of the Borrower; (b) Neither the Borrower nor, to the knowledge of the Borrower, any Affiliated Person of the Borrower, directly or indirectly, individually or in the aggregate, controls or, to the knowledge of the Borrower, after due inquiry, 14 is controlled by or under common control with, the Bank or, to the knowledge of the Borrower, any Affiliated of the Bank; (c) Neither the Borrower, to the knowledge of the Borrower, any Affiliated Person of the Borrower, directly or indirectly, individually or in the aggregate, controls or, to the knowledge of the Borrower, after due inquiry, is controlled by or under common control with, the Bank or, to the knowledge of the Borrower, any Affiliated Person of the Bank; (d) No officer, director or employee of the Borrower or, to the knowledge of the Borrower, any Affiliated Person of the Borrower is an Affiliated Person of the Bank or, to the knowledge of the Borrower, any Affiliated Person of the Bank; (e) Except as described in SCHEDULE III hereto, as amended and in effect from time to time, the Borrower does not, directly or indirectly, own, controls, or hold with power to vote, five percent or more of the outstanding voting securities of any issuer; and (f) Except as described in SCHEDULE IV, as amended and in effect from time to time, to the knowledge of the Borrower, no person, directly or indirectly, owns, controls or holds with power to vote, five percent or more of the outstanding voting securities of the Borrower. Section 4.12. DISCLOSURE. Neither this Agreement nor any of the information concerning the Borrower submitted to the Bank in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which they are made. Except as disclosed herein or in the Registration Statement, there is no fact known to the Borrower that materially adversely affects, or that, in the best judgment of the management of the Borrower, could in the future materially adversely affect, the assets, business, prospects, condition (financial or othewise) or operations of the Borrower. Section 5. COVENANTS. The Borrower covenants and agrees that, so long as any amounts are owing with respect to the Loans or otherwise under this Agreement, or if no such amount is owing, so long as the Bank shall have any commitment to make Loans hereunder as provided herein: Section 5.1. USE OF PROCEEDS. The Borrower shall use the punctually pay or cause to be paid principal and interest and all other sums due under this Agreement in accordance with the terms hereof. Section 5.3. TAXES, ETC. The Borrower (a) will file all federal, state, local, foreign and other tax returns, reports and declarations required by any jurisdiction to which the Borrower is subject on or before the due dates for the returns, reports and declarations, and (b) will pay and discharge, before the same shall become in arrears, all taxes, assessments and other governmental charges shown or determined to be due on such returns, reports and declarations, unless, and in any such case, the same is being contested in good faith by appropriate proceedings and an adequate reserve therefor has been established. Section 5.4. COMPLIANCE WITH LAW, ETC. The Borrower will comply in all material respects with (i) all applicable federal, state and local laws, rules, regulations and governmental or regulatory directives (whether or not having the 15 force of law), and all orders, writs, judgments, injunctions, decrees or awards to which it may be subject; (ii) all of its investment policies and restrictions set forth in the Registration Statement or otherwise; and (iii) the provisions of its Articles of Incorporation and bylaws and all agreements and instruments by which it or any of its property or assets may be affected or bound. Section 5.5. COMPLIANCE WITH REGULATION U. The Borrower will, at any time and from time to time upon receipt of notice from the Bank, and at the Borrower's expense, promptly execute and deliver or file all additional instruments and documents, and take all further action, that may be necessary or desirable, or that the Bank may reasonably request, in order to fully comply with the requirements of Regulation U. Section 5.6. NOTICE OF CERTAIN EVENTS. The Borrower will give the Bank prompt written notice of: (a) any change in any federal, state or local law, rule or regulation or governmental or regulatory directive (whether or not having the force of law) materially adversely affecting the Borrower, or any of its property or assets, or affecting the Borrower's ability to repay the Loans and comply with terms of this Agreement; (b) any change in its agreements with governmental authorities or regulators or its investment policies or restrictions that would make any of the information set forth in SCHEDULE I hereto incorrect, incomplete or misleading in any material respect, and will prepare and submit to the Bank for attachment to this Agreement an amendment to SCHEDULE I reflecting such change; (c) any change in its portfolio or in the ownership of its outstanding voting securities that would, to the best of the Borrower's knowledge, make any of the information set forth in SCHEDULES III and IV hereto incorrect or incomplete in any material respect, and will prepare and submit to the Bank for attachment to this Agreement an amendment to SCHEDULE III or IV, as applicable, reflecting such change; (d) any material change in its method of business or in the Registration Statement (it being understood that any change in the investment restrictions and limitations on indebtedness applicable to the Borrower shall constitute material changes); (e) the commencement of any litigation or any administrative, regulatory or arbitration proceeding or investigation to which the Borrower may hereafter become a party that may involve any material risk of any material final judgment or liability not adequately covered by insurance or that may otherwise result in any material adverse change in the business, assets, operations, prospects or condition (financial or otherwise) of the Borrower; and (f) the occurrence of any Default or Event of Default. Section 5.7. TOTAL VALUE OF ASSETS, ETC. The Borrower will, at any time and from time to time during normal business hours, notify the Bank by telephone or in writing, as requested by the Bank, of the total asset value of its 16 portfolio securities and the net asset value of the Borrower's securities, and any changes in any of such values, in each case as most recently calculated. Section 5.8. REPORTS, ADDITIONAL INFORMATION, ETC. The Borrower will cause the appropriate party to furnish to the Bank: (a) as soon as available, and not later than 90 days after the end of each fiscal year of the Borrower, the Annual Report of the Borrower, including audited financial statements certified by Deloitte & Touche or other independent public accountants of national standing, setting forth the Portfolio of Investments and the Statement of Assets and Liabilities of the Borrower, each as of the end of such fiscal year, and including Statements of Operations, Cash Flows and Changes in Net Assets of the Borrower for the fiscal period then ended; (b) as soon as available, and not later than 60 days after the end of each fiscal quarater of the Borrower, a Quarterly Report prepared by the Borrower, setting forth the Portfolio of Investments of the Borrower as of such date; (c) on request, and in any event not later than 45 days after the end of each fiscal quarter of the Borrower, a trial balance sheet as of the last day of such quarter, and a list of all investments as of such date, certified by the principal financial officer of the Borrower; (d) at the same times as such reports are furnished to the Borrower's shareholders, any additional reports required by Section 30(d) of the 1940 Act; (e) upon request by the Bank, within 10 Business Days after the issuance thereof, copies of all other regular and periodic reports and any other reports that the Borrower may be required to file with the Securities and Exchange Commission or any similar or corresponding governmental commission, department or agency substituted therefor; and (f) such other information with respect to the financial standing and history or the business, property, assets or prospects of the Borrower as the Bank may, at any time and from time to time, reasonably request. Section 5.9. FURTHER ASSURANCES. The Borrower will, at any time and from time to time, execute and deliver such additional instruments and take such further action as the Bank may reasonably request to carry out to the Bank's satisfaction the transactions contemplated by this Agreement. Section 5.10. PROHIBITED AFFILIATIONS. (a) The Borrower will not, directly or indirectly, own, control, or hold with power to vote, five percent or more of the outstanding voting securities of the Bank or any Affiliated Person of the Bank known to the Borrower to be such an Affiliated Person; (b) the Borrower will use its best efforts to ensure that it will not, directly or indirectly, control the Bank or any Affiliated Person of the Bank known to the Borrower to be such an Affiliated Person; and (c) the Borrower will use its best efforts to ensure that none of its officers, directors, or employees is or becomes an Affiliated Person of the Bank 17 or any Affiliated Person of the Bank known to the Borrower to be such an Affiliated Person. Section 5.11. NEGATIVE PLEDGE ON ASSETS. The Borrower will not create or permit to exist any lien or encumbrance upon any of its property or assets in favor of any person or entity other than the Bank; PROVIDED that the Borrower may create such liens as are necessary in connection with a secured letter of credit opened by the Borrower in connection with the Borrower's directors' and officers' errors and omissions liability insurance policy and may create any liens in connection with the payment of initial and variation margin in connection with authorized futures transactions and collateral arrangements with respect to options, futures contracts, options on futures contracts, when-issued or delayed delivery securities or other authorized investments. Section 6. EVENTS OF DEFAULT; ACCELERATION. Section 6.1. EVENTS OF DEFAULT; ACCELERATION. In any of the following events ("EVENTS OF DEFAULT" or, in the giving of notice or the lapse of time or both is required, then, prior to such notice and/or lapse of time, "DEFAULTS") shall occur: (a) if the Borrower shall fail to pay any principal of any Loan outstanding to it hereunder when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (b) if the Borrower shall fail to pay any interest on any Loan outstanding to it when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment, and such failure shall continue unremedied promptly after notice and in any event within for three Business Days; (c) if the Borrower shall fail to pay its Commitment Fee when the same shall become due and payable, and such failure shall continue unremedied for three Business Days; (d) if the Borrower shall fail to perform, discharge, observe or comply with any of the terms, covenants and agreements contained in Section 5.1, 5.6(f), 5.7, 5.10 or 5.11; (e) if the Borrower shall fail to perform, discharge, observe or comply with any of the terms, covenants and agreements contained herein (other than those specified in paragraphs (a), (b), (c), and (d) of this Section 6.1), and such failure shall continue unremedied for 30 days after written notice of such failure has been given to the Borrower by the Bank; (f) if any representation or warranty of the Borrower contained in this Agreement or any other document or instrument delivered by the Borrower pursuant to or in connection with this Agreement shall prove to have been false or misleading in any material respect as of the time when made or deemed to have been made; (g) if the Borrower shall fail in the performance or the payment, at maturity or within an applicable period of grace, of any obligation contained in any agreement or instrument evidencing any other indebtedness with respect to borrowed money or credit received, or any mortgage, pledge, agreement, indenture 18 or other agreement relating thereto, for such period of time as would, or would have permitted (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof; (h) if the Borrower makes an assignment for the benefit of creditors, or admits in writing its inability to pay or generally fails to pay its debts as they mature or become due, or petitions or applies for the appointment of a trustee (in bankruptcy) or other custodian, liquidator or receiver of the Borrower or of any substantial part of the property or assets of the Borrower or commences any case or other proceeding relating to the Borrower under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or takes any action or authorize or in furtherance of any of the foregoing; (i) if any such petition or application is filed or any such case or other proceeding is commenced against the Borrower and the Borrower indicates its approval thereof, consent thereto or acquiescence therein or an order for relief or appointing any such trustee (in bankruptcy), custodian, liquidator or receiver is entered adjudicating the Borrower bankrupt or insolvent, or approving a petition in any such case or other proceeding, and such order remains unstayed and in effect for more than 60 days, whether or not consecutive; (j) if there shall remain in force, undischarged, unsatisfied and unstayed, for more than 30 days, whether or not consecutive, any final judgment against the Borrower that, with other outstanding final judgments undischarged against the Borrower, (i) exceeds, in the aggregate, $25,000 or (ii) shall have a materially adverse effect upon the business, assets, operations, prospects or condition (financial or otherwise) of the Borrower; or (k) if there shall occur a material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower; then and in any such event and subject to the PROVISO at the end of this Section 6.1, the Bank may by written notice to the Borrower declare (i) the obligation of the Bank to make Loans to the Borrower to be terminated, whereupon the same shall terminate, (ii) the Loans of the Borrower, all interest thereon and all other amounts payable by the Borrower under this Agreement to be forthwith due and payable, whereupon such Loans, all such interest and all such other amounts shall become and be forthwith due and payable without presentment, demand, protest or notice (other than as required above), all of which are expressly waived by the Borrower, PROVIDED that upon the occurrence of any of the events specified in paragraphs (h) or (i) of this Section 6.1, such termination of the obligations to make Loans and acceleration of the maturity of the Loans shall occur automatically and without any action by the Bank. In case any one or more of the Events of Default shall have occurred and be continuing, and whether or not the Bank shall have accelerated the maturity of the Loans of the Borrower pursuant to the foregoing, the Bank may proceed to protect and enforce its rights by suit in equity, action at law and/or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or any instrument pursuant to which the obligations of the Borrower to the Bank hereunder are evidenced, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof 19 or any other legal or equitable right of the Bank hereunder. No remedy conferred upon the Bank herein is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. Section 7. SET-OFF. Any deposits, balances or other sums credited by or due from the Bank to the Borrower hereunder may be, at any time from time to time, set-off and applied by the Bank, in such order as the Bank in its sole discretion may determine, against the payment of all or any part of the obligations of the Borrower hereunder then due and payable and any other liabilities, direct or indirect, absolute or contingent, now existing or hereafter arising, of the Borrower then due and payable to the Bank hereunder. The Bank agrees promptly to notify the Borrower of such set-off or application, PROVIDED that the failure to give such notice shall not affect the validity of such set-off or application. Section 8. EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to reimburse the Bank upon demand for all reasonable expenses, including but not limited to reasonable attorneys' fees and disbursements (and the allocated costs of in-house counsel for the Bank), incurred or expended in connection with the preparation or interpretation of this Agreement or any amendment hereof, or with the enforcement of any obligations or the satisfaction of any indebtedness of the Borrower hereunder, or in connection with any litigation, proceeding or dispute hereunder in any way related to the Bank's relationship hereunder. Section 9. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein or in any documents or other papers delivered by, or on behalf of, the Borrower pursuant hereto shall be deemed to have been relied upon by the Bank, notwithstanding any investigation heretofore or hereafter made by it, and shall survive the making by the Bank of the Loans, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Agreement remains outstanding and unpaid or the Bank has obligation to make any Loans hereunder. All statements contained in any certificate, document or other paper delivered by any authorized person to the Bank at any time by or on behalf of the Borrower pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrower hereunder. Section 10. INDEMNIFICATION. (a) The Borrower agrees to indemnify and hold harmless the Bank from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Agreement or the transactions evidenced hereby; PROVIDED that the Bank shall have no right to be indemnified hereunder with respect to any such claims, actions, suits, liabilities, losses, damages and expenses to the extent arising as a result of its own gross negligence, willful misconduct or bad faith; and PROVIDED, FURTHER that the Borrower shall not be liable for any settlement, compromise or consent to the entry of any order adjudicating or otherwise disposing of any claim, action, suit, liability, loss, damage or expense effected without the consent of the Borrower. Should any claim be made by a person not a party to this Agreement 20 with respect to any matter to which the foregoing indemnity relates, the Bank shall promptly notify the Borrower of any such claim, and the Borrower shall have the right to direct and control the defense of such claim or any litigation based thereon at its own expense through counsel of its own choosing. (b) The Bank agrees to indemnify and hold harmless the Borrower from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Agreement or the transactions evidenced hereby; PROVIDED that the Borrower shall have no right to be indemnified hereunder with respect to any such claims, actions, suits, liabilities, losses, damages and expenses to the extent arising as a result of its own gross negligence, willful misconduct or bad faith; and PROVIDED, FURTHER that the Borrower shall not be liable for any settlement, compromise or consent to the entry of any order adjudicating or otherwise disposing of any claim, action, suit, liability, loss, damage or expense effected without the consent of the Bank. Should any claim be made by a person not a party to this Agreement with respect to any matter to which the foregoing indemnity relates, the Borrower shall promptly notify the Bank of any such claim, and the Bank shall have the right to direct and control the defense of such claim or any litigation based thereon at its own expense through counsel of its own choosing. Section 11. PARTIES IN INTEREST; PARTICIPATIONS. All the terms of this Agreement shall be binding upon the inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; PROVIDED that the Borrower may not assign or transfer its rights hereunder or any interest herein without the prior written consent of the Bank. The Bank may, with the prior written consent of the Borrower (which shall not be unreasonably withheld or delayed), assign or transfer to any other person or entity, all or any part of, or without such consent, grant loan participations therein; PROVIDED that in all cases other than the case of the sale of loan participations, the Bank shall give the Borrower prompt written notice thereof, and PROVIDED, FURTHER that the Borrower shall make payment of all amounts due and payable hereunder and deliver such documents as are required hereunder to the Bank until such time as it is notified in writing to do otherwise. Section 12. NOTICES, ETC. Except as otherwise expressly provided in this Agreement, all notices and other communications made or required to be given pursuant to this Agreement shall be in writing and shall be delivered by hand, by accepted express mail service, postage prepaid, or sent by telex or facsimile transmission and confirmed by letter, addressed as follows: (a) if to the Borrower, c/o Wellington Management Company, 75 State Street, Boston, Massachusetts 02109 Attention: Peter B. Culman or at such other address for notice as the Borrower shall last have furnished in writing to the Bank; or (b) if to the Bank, to the address set forth in the preamble of this Agreement, Attention: Carol A. Clark, Managing Director, or at such other address for notice as the Bank shall last have furnished in writing to the Borrower. Any such notice shall be deemed to have been duly given or made and to have become effective (a) if delivered by hand to a responsible officer of the party to which it is directed, at the time of receipt thereof by such officer, (b) if 21 sent by accepted express mail service, postage prepaid, one Business Day after posting thereof, and (c) if sent by facsimile transmission or telex, at the time of receipt of any automatic answer-back or other similar acknowledgment of receipt thereof. Section 13. MISCELLANEOUS. This Agreement shall be deemed to be a contract under the laws of the Commonwealth of Massachusetts and shall for all purposes be construed in accordance with and governed by the laws of said Commonwealth. The rights and remedies herein expressed are cumulative and not exclusive of any other rights that the Bank or the Borrower, as the case may be, would otherwise have. The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Agreement, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. Section 14. SEVERABILITY. If any of the provisions of this Agreement or the application thereof to any party hereto or to any person or entity or circumstance is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision hereof or thereof or the application thereof to any other party hereto or to any other person or entity or circumstance. Section 15. ENTIRE AGREEMENT, ETC. This Agreement, together with any of the documents executed in connection herewith, express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally or in writing, except as provided in Section 16 hereof. Section 16. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise expressly provided in this Agreement, any consent or approval required or permitted by this Agreement to be given by the Bank may be given, and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by the Borrower of any terms of this Agreement or such other instrument or the continuance of any Default or Event of Default or any condition or term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrower and the written consent of the Bank. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to the Borrower shall entitle the Borrower to other or further notice in similar or other circumstances. Section 17. WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH 22 A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK AND THE BORROWER, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE BORROWER HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGARPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement tro be duly executed as an instrument under seal by its duly authorized officer as of the date first written above. THE HIGH YIELD PLUS FUND, INC. By: -------------------------------------- Title: THE FIRST NATIONAL BANK OF BOSTON By: -------------------------------------- Vice President SCHEDULE I ---------- THE HIGH YIELD PLUS FUND, INC. LIMITATIONS ON BORROWING AND PLEDGING ASSETS Part 1. Agreements with Regulators: --------------------------- Part 2. Limitations on Borrowing Contained in Registration -------------------------------------------------- Statement: ---------- The Borrower's Registration Statement provides as follows: "The Fund intends from time to time, at the Investment Adviser's discretion, to obtain investment leverage through bank or other borrowing of up to 33 1/3% of the Fund's total assets (including the amount borrowed), less all liabilities and indebtedness other than the bank or other borrowing. This is equivalent to borrowing up to 50% of the value of the Fund's net assets. Subject to such limitations as may be specified in applicable margin regulations of the Board of Governors of the Federal Reserve System, the Fund may engage in such borrowing by issuing commercial paper or notes or other evidence of indebtedness, secured by pledge or otherwise. The Fund will have asset coverage (as defined in the 1940 Act) of not less than 300% with respect to any borrowings for investment leverage purposes when made. This allows the Fund to borrow for investment purposes an amount equal to as much as 50% of the value of its net assets. The Fund may not, however, repurchase any of its outstanding shares or pay a dividend unless the Fund will have asset coverage of not less than 300% with respect to such borrowings upon completion of the repurchase or payment of the dividend." SCHEDULE II ----------- THE HIGH YIELD PLUS FUND, INC. WIRING INSTRUCTIONS ------------------- State Street Bank and Trust Company Boston, MA 02101 ABA # 011000028 DDA # 32321754 Reference: High Yield Plus Fund, #1968 SCHEDULE III ------------ THE HIGH YIELD PLUS FUND, INC. ISSUERS 5% OR MORE OF WHOSE OUTSTANDING VOTING SECURITIES ARE OWNED OR CONTROLLED BY THE BORROWER % of Voting Securities Name of Issuer Owned by Borrower - -------------- ----------------- NONE EXHIBIT A --------- LOAN REQUEST I, ______________________________, ________________________ of THE HIGH YIELD PLUS FUND, INC., (the "Borrower"), acting pursuant to Section 2.2 of the Credit Agreement dated as of October 31, 1993 by and between The First National Bank of Boston (the "Bank") and the Borrower (the "Agreement"), do hereby certify to the Bank as follows: 1. The Borrower has requested that the Bank make a Loan (as defined in the Agreement) in the principal amount of $___________ on the date hereof (the "Requested Loan") to mature on ________________ and to bear interest at the [Adjusted Eurodollar Rate plus 1%] [Money Market Rate of _____%] [Base Rate]. 2. On the date hereof, the total asset value of the Borrower's portfolio securities is $________________; the net asset value of the Borrower's portfolio is $_______________; and the total value of the unencumbered assets in the Borrower's portfolio is $_________________________________. 3. The total principal amount outstanding of all Loans made pursuant to the Agreement is __________________________ on the date hereof prior to the borrowing of the Requested Loans. 4. The Maximum Amount (as defined in the Agreement) for the Borrower, being the maximum amount the Borrower is authorized to borrow under the Agreement on the date hereof, is $_________________________________. 5. Except as described on attached Schedule III hereto, the Borrower does not directly or indirectly own, control or hold with power to vote, 5% or more of the outstanding voting securities of any issuer. 6. The representations and warranties set forth in Section 4 of the Agreement are true and correct as of the date hereof as though made on and as of the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of ___________, 19__. THE HIGH YIELD PLUS FUND, INC. By: _____________________________ Title: EXHIBIT B KIRKPATRICK & LOCKHART South Lobby - 9th Floor 1800 M Street, N.W. Washington, D.C. 20036-5891 ----------- Telephone (202) 778-9000 Telex 440209 KL DC UI FACSIMILE (202) 778-9100 Arthur J. Brown (202) 778-9046 October 31, 1993 The First National Bank of Boston 100 Federal Street Boston, MA 02110 RE: Credit Agreement dated as of October 31, 1993 by and between The First National Bank of Boston and The High Yield Plus Fund, Inc. Gentlemen: We are counsel to The High Yield Plus Fund, Inc. (the "Borrower") and have represented the Borrower in connection with the preparation, execution and delivery of the Credit Agreement dated as of October 31, 1993 (the "Agreement") between The First National Bank of Boston (the "Bank") and the Borrower. We are rendering this opinion to you pursuant to section 3.1(e) of the Credit Agreement. All terms not defined herein and defined in the Agreement shall have the same meanings herein as in the Agreement. We have examined executed counterparts of the Agreement and originals, or copies, the authenticity of which has been established to our satisfaction, of such other documents, corporate records, agreements and instruments and certificates of public officials and officers of the Borrower as we have deemed necessary as the basis for the opinions herein expressed. As to the questions of fact material to such opinions we have, when relevant facts were not independently established, relied upon certifications by officers of the Borrower. Based on the foregoing and having regard for legal considerations as we have deemed relevant, and subject to the limitations and qualifications below, it is our opinion that: 1. The Borrower is duly organized and validly existing under the laws of the State of Maryland and is duly qualified to do business in each other jurisdiction wherein the nature of its properties or its business requires such qualification and in which the failure to be so qualified may reasonably be expected to materially adversely affect the business, assets or condition (financial or otherwise) of the Borrower. The First National Bank of Boston October 31, 1993 Page 2 2. The Borrower is registered as a closed-end management investment company under the 1940 Act. 3. The execution, delivery and performance by the Borrower of the Agreement are within the corporate powers of the Borrower, have been duly authorized by all necessary and proper action on the part of the Borrower, and do not and will not (i) violate or contravene any provision of the Borrower's Articles of Incorporation or bylaws, as amended and in effect on the date hereof, (ii) violate or contravene any provision of the Borrower's Registration Statement, (iii) to our knowledge, conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of the property or assets of the Borrower under, any agreement, trust deed, indenture, mortgage or other instrument to which the Borrower is a party or by which the Borrower or any of the property or assets of the Borrower is bound or affected, or (iv) to our knowledge, violate or contravene any provision of any material law, regulation, order, ruling or interpretation thereunder or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official. 4. The Agreement has been duly executed and delivered by the Borrower. We know of no reason why the choice of law provisions of the Agreement, which set forth Massachusetts law as the governing law, would not be enforced by the courts of the state of Maryland, as agreed upon by the parties. However, if the law of the state of Maryland is deemed to be the governing law, the Agreement and all of the terms and provisions thereof are the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting enforcement of creditors' rights generally, except as the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought, and except as rights to indemnification may be limited by applicable law or equitable principles or may otherwise be unenforceable as against public policy. 5. No authorization, approval, consent, or other action by, and no notice to or filing with, any shareholder or creditor of the Borrower, or governmental or regulatory agency or authority, is required to make valid and legally binding the execution, delivery and performance by the Borrower of the Agreement or the consummation by the Borrower of the transactions contemplated by the Agreement, or the exercise by the Bank of its rights and remedies thereunder. The First National Bank of Boston October 31, 1993 Page 3 6. To our knowledge, there are no pending or threatened actions, suits, investigations or proceedings at law or in equity before any federal or state court, governmental or regulatory authority, agency, commission, board, bureau or instrumentality, or board of arbitration, against or affecting the Borrower or its right, title and interest in or to any of its properties or assets an adverse decision in which could materially and adversely affect the financial condition or business of the Borrower. This letter and the opinions expressed herein are being furnished solely for your information and may not be relied upon by any other person without our prior written consent. Whenever a statement herein is qualified by the phrase "to our knowledge," or words of similar import, it is intended to indicate that, during the course of our representation of the Borrower, no information that would give us current actual knowledge of the inaccuracy of such statement has come to the attention of those attorneys presently in this firm who have rendered legal services in connection with the representation described in the introductory paragraph of this opinion letter. However, we have not undertaken any independent investigation or review to determine the accuracy of any such statement, and any limited inquiry undertaken by us during the preparation of this opinion letter should not be regarded as such an investigation or review. No inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of the Borrower. Very truly yours, /s/ Kirkpatrick & Lockhart -------------------------- KIRKPATRICK & LOCKHART EX-99.2(K)(3)(I) 12 Exhibit 2(k)(3)(i) THE HIGH YIELD PLUS FUND, INC. FIRST AMENDMENT To CREDIT AGREEMENT The First Amendment (this "AMENDMENT") dated as of October 30, 1994 amends the Credit Agreement dated as of October 31, 1993 (the "CREDIT AGREEMENT"), between THE HIGH YIELD PLUS FUND, INC. (the "BORROWER") the THE FIRST NATIONAL BANK OF BOSTON (the "BANK"). Capitalized terms used herein but not otherwise defined shall have the meanings assigned to them in the Credit Agreement. WHEREAS, the Borrower and the Bank have executed the Credit Agreement providing for a revolving credit facility for borrowings by the Borrower to leverage its investment portfolio in amounts up to $30,000,000; and WHEREAS, the Borrower has requested that the credit facility be extended for an additional 364-day period, and the Bank is willing to so extend the facility on the terms and conditions set forth below; NOW THEREFORE, the Bank and the Borrower agrees as follows: SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT. Section 2.4 of the Credit Agreement is hereby amended by deleting the date "October 30, 1994" and substituting therefor the date "October 27, 1995". SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants as follows: (a) The execution and delivery of this Amendment and the performance by the Borrower of the Credit Agreement as amended hereby, are within the powers of the Borrower, have been duly authorized by all necessary and proper action on the part of the Borrower, and do not and will not (i) violate or contravene any provision of the Borrower's Articles of Incorporation or bylaws, or any amendment thereof, (ii) violate or contravene any provision of the Borrower's Prospectus or Registration Statement, (iii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of the property or assets of the Borrower under, any agreement, trust deed, indenture, mortgage or other instrument to which the Borrower is a party or by which the Borrower or any of its property or assets is bound or affected, or (iv) violate or contravene any provision of any material law, regulation, order, ruling or interpretation thereunder or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official. (b) This Amendment and the Credit Agreement as amended hereby and all the provisions hereof and thereof constitute the legally valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. (c) No authorization, approval, consent or other action by, and no notice to or filing with, any shareholder or creditor of the Borrower, or governmental or regulatory agency or authority, is required to make valid and legally binding the execution and delivery by the Borrower of this Amendment and the performance of the Credit Agreement as amended hereby or the consummation by the Borrower of the transactions contemplated hereby and thereby, or the exercise by the Bank of its rights and remedies hereunder or thereunder. (d) The representations and warranties contained in Section 4 of the Credit Agreement are true and correct as of the date thereof as though made on and as of the date hereof. SECTION 3. CONDITIONS TO EFFECTIVENESS. This effectiveness of this Amendment is conditioned upon the following: (a) receipt by the Bank and the Borrower of a duly executed counterpart of this Amendment; (b) receipt by the Bank of a certificate of the Secretary or an Assistant Secretary of the Borrower with respect to (i) resolutions of the Board of Directors of the Borrower authorizing the execution and delivery of this Amendment and (ii) identification of the officer(s) authorized to execute, deliver and take all other actions required under this Amendment and the Credit Agreement as amended hereby, providing specimen signatures of such officers; and (c) delivery of such other documents, and completion of such other matters, as counsel for the Bank may deem necessary or appropriate. SECTION 4. MISCELLANEOUS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement" or words of like import shall mean and be deemed to be a reference to the Credit Agreement as amended hereby. (b) Except as amended and modified hereby, the Credit Agreement is in all respects ratified and confirmed as of the date hereof, and the terms, covenants and agreements therein shall remain in full force and effect. (c) This Amendment and modifications to the Credit Agreement set forth herein shall be deemed to be a document executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. (d) This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and the year first above written. THE HIGH YIELD PLUS FUND, INC. By: Title: President and Treasurer THE FIRST NATIONAL BANK OF BOSTON By: Title: Managing Director EX-99.2(K)(3)(II) 13 Exhibit 2(k)(3)(ii) THE HIGH YIELD PLUS FUND, INC. SECOND AMENDMENT To CREDIT AGREEMENT This Second Amendment (this "AMENDMENT") dated as of September 1, 1995 amends the Credit Agreement dated as of October 31, 1993 as amended by the First Amendment dated as of October 30, 1994 (as so amended, the "CREDIT AGREEMENT"), between THE HIGH YIELD PLUS FUND, INC. (the "BORROWER" and THE FIRST NATIONAL BANK OF BOSTON (the "BANK"). Capitalized terms used herein but not otherwise defined shall have the meanings assigned to them in the Credit Agreement. WHEREAS, the Borrower and the Bank have executed the Credit Agreement providing for a revolving credit facility for borrowings by the Borrower to leverage its investment portfolio in amounts up to $30,000,000; and WHEREAS, the Borrower has requested that the credit facility be extended for an additional period of time, and the Bank is willing to so extend the facility on the terms and conditions set forth below; NOW, THEREFORE, the Bank and the Borrower agree as follows: SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT. Section 2.4 of the Credit Agreement is hereby amended by deleting the date "October 27, 1995" and substituting therefor the date "August 31, 1996." SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants as follows: (a) The execution and delivery of this Amendment and the performance by the Borrower of the Credit Agreement as amended hereby, are within the powers of the Borrower, have been duly authorized by all necessary and proper action on the part of the Borrower, and do not and will not (i) violate or contravene any provision of the Borrower's Articles of Incorporation or bylaws, or any amendment thereof, (ii) violate or contravene any provision of the Borrower's Prospectus or Registration Statement, (iii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of the property or assets of the Borrower under, any agreement, trust deed, indenture, mortgage or other instrument to which the Borrower is a party or by which the Borrower or any of its property or assets is bound or affected, or (iv) violate or contravene any provision of any material law, regulation, order, ruling or interpretation thereunder or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official. (b) This Amendment and the Credit Agreement as amended hereby and all the provisions hereof and thereof constitute the legally valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. (c) No authorization, approval, consent or other action by, and no notice to or filing with, any shareholder or creditor of the Borrower, or governmental or regulatory agency or authority, is required to make valid and legally binding the execution and delivery by the Borrower of this Amendment and the performance of the Credit Agreement as amended hereby or the consummation by the Borrower of the transactions contemplated hereby and thereby, or the exercise by the Bank of its rights and remedies hereunder or thereunder. SECTION 3. CONDITIONS TO EFFECTIVENESS. This effectiveness of this Amendment is conditioned upon the following: (a) receipt by the Bank and the Borrower of a duly executed counterpart of this Amendment; (b) receipt by the Bank of a certificate of the Secretary or an Assistant Secretary of the Borrower with respect to (i) resolutions of the Board of Directors of the Borrower authorizing the execution and delivery of this Amendment and (ii) identification of the officer(s) authorized to execute, deliver and take all other actions required under this Amendment and the Credit Agreement as amended hereby, providing specimen signatures of such officers; (c) the representations and warranties contained in Section 4 of the Credit Agreement shall be true and correct in all material respects as of the date hereof as though made on and as of the date hereof, except that the references in Section 4 to "this Agreement" shall mean and be deemed to be references to the Credit Agreement as amended hereby; and (d) No Default under the Credit Agreement shall have occurred and be continuing. SECTION 4. MISCELLANEOUS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement" or words of like import shall mean and be deemed to be a reference to the Credit Agreement as amended hereby. 2 (b) Except as amended and modified hereby, the Credit Agreement is in all respects ratified and confirmed as of the date hereof, and the terms, covenants and agreements therein shall remain in full force and effect. (c) This Amendment and modifications to the Credit Agreement set forth herein shall be deemed to be a document executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. (d) This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. THE HIGH YIELD PLUS FUND, INC. By: --------------------------- Title: President THE FIRST NATIONAL BANK OF BOSTON By: ---------------------------- Title: Division Executive 3 EX-99.2(K)(3)(III) 14 Exhibit 2(k)(3)(iii) THE HIGH YIELD PLUS FUND, INC. THIRD AMENDMENT To CREDIT AGREEMENT This Third Amendment (this "AMENDMENT") dated as of May 15, 1996 amends the Credit Agreement dated as of October 31, 1993 as amended by the First Amendment dated as of October 30, 1994 and the Second Amendment dated as of September 1, 1995 (as so amended, the "CREDIT AGREEMENT"), between THE HIGH YIELD PLUS FUND, INC. (the "BORROWER") and THE FIRST NATIONAL BANK OF BOSTON (the "BANK"). Capitalized terms used herein but not otherwise defined shall have the meanings assigned to them in the Credit Agreement. WHEREAS, the Borrower and the Bank have executed the Credit Agreement providing for a revolving credit facility for borrowings by the Borrower to leverage its investment portfolio in amounts up to $30,000,000; and WHEREAS, the Borrower has requested that the credit facility be extended for an additional period of time, and the Bank is willing to so extend the facility on the terms and conditions set forth below; NOW, THEREFORE, the Bank and the Borrower agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT Section 2.4 of the Credit Agreement is hereby amended by deleting the date "August 31, 1996" and substituting therefor the date "May 15, 1999". Section 2.6 of the Credit Agreement is amended to read in its entirety as follows: "2.6. COMMITMENT FEE. The Borrower agrees to pay to the Bank, for the period commencing on the date this Amendment is executed by the Bank and the Borrower and ending on the Commitment Expiry Date, a commitment fee (the "COMMITMENT FEE") computed at the rate of one percent (1/10%) per annum of the average daily unused Commitment Amount, payable quarterly in arrears on the last day of each March, June, September and December and on the Commitment Expiry Date. SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants as follows: (a) The execution and delivery of this Amendment and the performance by the Borrower of the Credit Agreement as amended hereby, are within the powers of the Borrower, have been duly authorized by all necessary and proper action on the part of the Borrower, and do not and will not (i) violate or contravene any provision of the Borrower's Articles of Incorporation bylaws, or any amendment thereof, (ii) violate or contravene any provision of the Borrower's Prospectus or Registration Statement, (iii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of the property or assets of the Borrower under, any agreement, trust deed, indenture, mortgage or other instrument to which the Borrower is a party or by which the Borrower or any of its property or assets is bound or affected, or (iv) violate or contravene any provision of any material law, regulation, order ruling or interpretation thereunder or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official. (b) This Amendment and the Credit Agreement as amended hereby and all the provisions hereof and thereof constitute the legally valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' right and except to the extent that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. (c) No authorization, approval, consent or other action by, and no notice to or filing with, any shareholder or creditor of the Borrower, or governmental or regulatory agency or authority, is required to make valid and legally binding the execution and delivery by the Borrower of this Amendment and the performance of the Credit Agreement as amended hereby or the consummation by the Borrower of the transactions contemplated hereby and thereby, or the exercise by the Bank of its rights and remedies hereunder or thereunder. SECTION 3. CONDITIONS TO EFFECTIVENESS. This effectiveness of this Amendment is conditioned upon the following: (a) receipt by the Bank and the Borrower of a duly executed counterpart of this Amendment; (b) receipt by the Bank of a certificate of the Secretary or an Assistant Secretary of the Borrower with respect to (i) resolutions of the Board of Directors of the Borrower authorizing the execution and delivery of this Amendment and (ii) identification of the officer(s) authorized to execute, deliver and take all other actions required under this Amendment and the Credit Agreement as amended hereby, providing specimen signatures of such officers; (c) the representations and warranties contained in Section 4 of the Credit Agreement shall be true and correct in all material respects of the date hereof as though made on and as of the date hereof, except that the references in Section 4 to "this Agreement" shall mean and be deemed to be references to the Credit Agreement as amended hereby; and 2 (d) No Default under the Credit Agreement shall have occurred and be continuing. SECTION 4. MISCELLANEOUS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement" or words of like import shall mean and be deemed to be a reference to the Credit Agreement as amended hereby. (b) Except as amended and modified hereby, the Credit Agreement is in all respects ratified and confirmed as of the date hereof, and the terms, convenants and agreements therein shall remain in full force and effect. (c) This Amendment and the modifications to the Credit Agreement set forth herein shall be deemed to be a document executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. (d) This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and the year first above written. THE HIGH YIELD PLUS FUND, INC. By: ----------------------------- Title: THE FIRST NATIONAL BANK OF BOSTON By: ----------------------------- Title: Division Executive 3 EX-99.2(K)(3)(IV) 15 Exhibit 2(k)(3)(iv) THE HIGH YIELD PLUS FUND, INC. FOURTH AMENDMENT To CREDIT AGREEMENT This Fourth Amendment (this "AMENDMENT") dated as of March 11, 1997 amends the Credit Agreement dated as of October 31, 1993 as amended by the First Amendment dated as of October 30, 1994 the Second Amendment dated as of September 1, 1995 and the Third Amendment dated as of May 15, 1996 (as so amended, the "CREDIT AGREEMENT"), between THE HIGH YIELD PLUS FUND, INC. (the "BORROWER") and THE FIRST NATIONAL BANK OF BOSTON (the "BANK"). Capitalized terms used herein but not otherwise defined shall have the meanings assigned to them in the Credit Agreement. WHEREAS, the Borrower and the Bank have executed the Credit Agreement providing for a revolving credit facility for borrowings by the Borrower to leverage its investment portfolio in amounts up to $30,000,000; and WHEREAS, the Borrower has requested that the interest rates applicable to certain loans under credit facility be reduced, and the Bank is willing to so extend the facility on the terms and conditions set forth below; NOW, THEREFORE, the Bank and the Borrower agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT. Section 2.7(a)(ii) of the Credit Agreement is hereby amended by deleting the percentage "1%" appearing therein and substituting therefor the percentage "0.55%". SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants as follows: (a) The execution and delivery of this Amendment and the performance by the Borrower of the Credit Agreement as amended hereby, are within the powers of the Borrower, have been duly authorized by all necessary and proper action on the part of the Borrower, and do not and will not (i) violate or contravene any provision of the Borrower's Articles of Incorporation bylaws, or any amendment thereof, (ii) violate or contravene any provision of the Borrower's Prospectus or Registration Statement, (iii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of the property or assets of the Borrower under, any agreement, trust deed, indenture, mortgage or other instrument to which the Borrower is a party or by which the Borrower or any of its property or assets is bound or affected, or (iv) violate or contravene any provision of any material law, regulation, order ruling or interpretation thereunder or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official. (b) This Amendment and the Credit Agreement as amended hereby and all the provisions hereof and thereof constitute the legally valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' right and except to the extent that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. (c) No authorization, approval, consent or other action by, and no notice to or filing with, any shareholder or creditor of the Borrower, or governmental or regulatory agency or authority, is required to make valid and legally binding the execution and delivery by the Borrower of this Amendment and the performance of the Credit Agreement as amended hereby or the consummation by the Borrower of the transactions contemplated hereby and thereby, or the exercise by the Bank of its rights and remedies hereunder or thereunder. SECTION 3. CONDITIONS TO EFFECTIVENESS. This effectiveness of this Amendment is conditioned upon the following: (a) receipt by the Bank and the Borrower of a duly executed counterpart of this Amendment; (b) the representations and warranties contained in Section 4 of the Credit Agreement shall be true and correct in all material respects of the date hereof as though made on and as of the date hereof, except that the references in Section 4 to "this Agreement" shall mean and be deemed to be references to the Credit Agreement as amended hereby; and (c) No Default under the Credit Agreement shall have occurred and be continuing. (d) this amendment shall become effective immediately following the occurrence of items (a), (b), and (c) above. The continued effectiveness of this amendment, however, is subject to approval, by duly executed resolution, of the Board of Directors of the Borrower at its next regularly scheduled meeting following the preliminary effectiveness of this amendment. SECTION 4. MISCELLANEOUS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement" or words of like import shall mean and be deemed to be a reference to the Credit Agreement as amended hereby. 2 (b) Except as amended and modified hereby, the Credit Agreement is in all respects ratified and confirmed as of the date hereof, and the terms, convenants and agreements therein shall remain in full force and effect. (c) This Amendment and the modifications to the Credit Agreement set forth herein shall be deemed to be a document executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. (d) This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and the year first above written. THE HIGH YIELD PLUS FUND, INC. By: -------------------------------- Title: Assistant Secretary THE FIRST NATIONAL BANK OF BOSTON By: -------------------------------- Title: Vice President 3 EX-99.2(K)(3)(V) 16 Exhibit 2(k)(3)(v) THE HIGH YIELD PLUS FUND, INC. FIFTH AMENDMENT To CREDIT AGREEMENT This Fifth Amendment (this "AMENDMENT") dated as of May 22, 1998 amends the Credit Agreement dated as of October 31, 1993, as amended by the First Amendment dated as of October 30, 194, the Second Amendment dated as of September 1, 1995, the Third amendment dated as of April 1, 1996 and the Fourth Amendment dated as of April 1, 197 (as so amended, the "CREDIT AGREEMENT"), between THE HIGH YIELD PLUS FUND, INC. (the "BORROWER") and BANKBOSTON, N.A., formerly known as THE FIRST NATIONAL BANK OF BOSTON (the "BANK"). Capitalized terms used herein but not otherwise defined shall have the meanings assigned to them in the Credit Agreement. WHEREAS, the Borrower and the Bank have executed the Credit Agreement providing for a revolving credit facility for borrowings by the Borrower to leverage its investment portfolio in amounts up to $30,000,000 (the "Commitment Amount"); and WHEREAS, the Borrower has requested that the Commitment Amount be increased to $35,000,000, and the Bank is willing to so increase the Commitment Amount on the terms and conditions set forth below; WHEREAS, in addition, the Borrower has requested that the credit facility be extended for an additional period of time and the Bank is willing to so extend the facility on the terms and conditions set forth below; and WHEREAS, the Borrower has requested that the interest rates applicable to certain loans under the credit facility be reduced, and the Bank is willing to so extend the facility on the terms and conditions set forth below; NOW, THEREFORE, the Bank and the Borrower agree as follows: SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT. (a) Section 1.1. of the Credit Agreement is hereby amended by deleting the definition "COMMITMENT AMOUNT" in its entirety and substituting therefor the following: "COMMITMENT AMOUNT. The maximum amount of the Bank's commitment to make Loans to the Borrower, which initially shall be $35,000,000, as the same may be reduced from time to time pursuant to Section 2.4 hereof or terminated pursuant to Section 2.4 or Section 6.1 hereof." (b) Section 2.4 of the Credit Agreement is hereby amended by deleting the date "May 15, 1999" and substituting therefor the date "May 15, 2000". (c) Section 2.6 of the Credit Agreement is amended to read in its entirety as follows: "2.6 COMMITMENT FEE. The Borrower agrees to pay to the Bank, for the period commencing on the date this Amendment is executed by the Bank and the Borrower and ending on the Commitment Expiry Date, a commitment fee (the "COMMITMENT FEE") computed at the rate of none one hundredth of one percent (.09%) per annum of the average daily unusued Commitment Amount, payable quarterly in arrears on the last day of each March, June, September and December and on the Commitment Expiry Date. (d) Section 2.7(a)(ii) of the Credit Agreement is hereby amended by deleting the percentage "0.55%" appearing therein and substituting therefor the percentage "0.50%". SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants as follows: (a) The execution and delivery of this Amendment, and the performance by the Borrower of the Credit Agreement as amended hereby, are within the powers of the Borrower, have been duly authorized by all necessary and proper action on the part of the Borrower, and do not and will not (i) violate or contravene any provision of the Borrower's Articles of Incorporation or bylaws, or any amendment thereof, (ii) violate or contravene any provision of the Borrower's Prospectus or Registration Statement, (iii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of the property or assets of the Borrower under, any agreement, trust deed, indenture, mortgage or other instrument to which the Borrower is a party or by which the Borrower or any of its property or assets is bound or affected, or (iv) violate or contravene any provision of any material law, regulation, order, ruling or interpretation thereunder or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official. (b) This Amendment and the Credit Agreement as amended hereby and all the provisions hereof and thereof constitute the legally valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. 2 (c) No authorization, approval, consent or other action by, and no notice to or filing with, any shareholder or creditor of the Borrower, or governmental or regulatory agency or authority, is required to make valid and legally binding the execution and delivery by the Borrower of this Amendment and the performance of the Credit Agreement as amended hereby or the consummation by the Borrower of the transactions contemplated hereby and thereby, or the exercise by the Bank of its rights and remedies hereunder or thereunder. SECTION 3. CONDITIONS TO EFFECTIVENESS. This effectiveness of this Amendment is conditioned upon the following: (a) receipt by the Bank and the Borrower of a duly executed counterpart of this Amendment; (b) receipt by the Bank of a certificate of the Secretary or an Assistant Secretary of the Borrower with respect to (i) resolutions of the Board of Directors of the Borrower authorizing the execution and delivery of this Amendment and (ii) identification of the officer(s) authorized to execute, deliver and take all other actions required under this Amendment and the Credit Agreement as amended hereby, providing specimen signatures of such officers; (c) receipt by the Bank of the Borrower's good standing certificate from The Secretary of State of Maryland; (d) the representations and warranties contained in Section 4 of the Credit Agreement shall be true and correct in all material respects as of the date hereof as though made on and as of the date hereof, except that the references in Section 4 to "this Agreement" shall mean and be deemed to be references to the Credit Agreement as amended hereby; and (e) No Default under the Credit Agreement shall have occurred and be continuing. SECTION 4. MISCELLANEOUS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement" or words of like import shall mean and be deemed to be a reference to the Credit Agreement as amended hereby. (b) Except as amended and modified hereby, the Credit Agreement is in all respects ratified and confirmed as of the date hereof, and the terms, covenants and agreements therein shall remain in full force and effect. (c) This Amendment and the modifications to the Credit Agreement set forth herein shall be deemed to be a document executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. 3 (d) This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and the year first above written. THE HIGH YIELD PLUS FUND, INC. By: __________________________________ Title: BankBoston, N.A. By: __________________________________ Title: SECRETARY'S CERTIFICATE This Certificate is delivered pursuant to Section 3(b) of that certain Fifth Amendment to Credit Agreement (the "Amendment") dated as of May 22, 1998 among The High Yield Plus Fund, Inc. (the "Corporation") and BankBoston, N.A., formerly known as The First National Bank of Boston (the "Bank"). I, Arthur J. Brown, hereby certify that: (a) I am the duly elected and qualified Secretary of the Corporation and that, as such, I am authorized to execute this Certificate on behalf of the Corporation; (b) the person listed below has been duly elected to and now holds the office set forth below her name and is currently serving in such capacity, and the signature of such person set forth opposite her name is such person's true and genuine signature, and such person is authorized to execute, deliver and take all other actions required under the Amendment and the Credit Agreement as amended thereby: NAME AND OFFICE SIGNATURE Stephanie A. Djinis _________________________________ Assistant Secretary (c) attached hereto as Exhibit A is a true and correct copy of resolutions duly adopted by the Board of Directors of the Corporation at a meeting held on May 12, 1998, that authorize Stephanie A. Djinis, Assistant Secretary, to enter into the Amendment and take any and all actions contemplated thereby to be taken by the Corporation; that passage of said resolutions was in all respects legal; and that said resolutions are in full force and effect as of the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand as of this 20th day of May, 1998. --------------------------------- Arthur J. Brown, Secretary Subscribed and sworn to before me, a Notary Public, this 20th day of May, 1998. -----END PRIVACY-ENHANCED MESSAGE-----