N-30D 1 mf15493.txt HIGH YIELD PLUS FUND -- PROSPECTUS -- 5/30/02 The High Yield Plus Fund, Inc. ANNUAL REPORT March 31, 2002 Letter To Shareholders April 22, 2002 Dear Shareholder: The high yield market finished a tumultuous fiscal year by rebounding slightly in the first three months of 2002. After returning -1.0% for the first nine months, the US high yield market (as measured by the Lehman HY Index) returned +0.6% for the year. The market has been lifted by an economy that is slowly showing signs of improvement following the economic slowdown of last year, accentuated by the events in September. During the first three months of 2002, the yield on the 10-year US Treasury increased by 35 basis points. Over that same time period, the spread of the Lehman HY Index (versus the 10-year US Treasury) narrowed by 102 basis points and is now yielding 11.79%. As of March 31, 2002 the spread of the Lehman HY Index to the 10-year US Treasury was 639 basis points. This spread is 75 basis points wide to the five-year historical average of 564 basis points, and it is well outside the ten-year historical average of 457 basis points. We are encouraged by some positive market signals, such as a healthy new issue calendar, strong flows into high yield mutual funds, and indications of an economic recovery. Although the trailing twelve month default rate remained high (17.1% through February), we expect this number to decline going forward. Many of the lower-rated issues that came to market in the late 1990s have already defaulted, and the newer issues over the last 18 months have generally been higher quality with better credit fundamentals. We would also observe that BB securities, which show much greater interest rate sensitivity, have benefited over the last two years and seen enhanced returns as a result of the market's bias towards risk avoidance. Due to the recent signs of economic improvement, however, lower-quality single B companies are poised to benefit from an economic recovery. Valuations also appear attractive for the long-term investor. The average dollar price of the market is in the mid 80's, and this price, along with the imbedded high yield differential, appears to offer reasonable protection from the market's presently high rate of default. Fund Performance The Fund's total returns for periods ended March 31, 2002 are shown on the following table. For comparison, we have also provided the returns of the Lipper Closed-End Leveraged High Yield category, an average of 25 closed-end high yield leveraged funds; we would note that the degree of leverage varies substantially amongst the funds in the group. This fact notwithstanding we are disappointed with the Fund's performance over the past year, and we attribute much of the underperformance to the dramatic divergence between B and BB rated issues. TOTAL RETURNS For the Periods Ended March 31, 2002 6 Months 1 Year 2 Years* High Yield Plus Fund (NAV)1 6.3% -7.9% -8.3% Lipper CEHY - Leveraged 10.1 -4.1 -6.0 1 Represents NAV-basis performance calculations as provided by Lipper Analytical Services, Inc. Past performance is no guarantee of future results. Returns based on market performance of the Fund's shares would be different. * Annualized 1 Despite the significant underperformance of B-rated bonds over the last two years, we believe that this "credit" sector of the high yield market will rebound and ultimately outperform higher quality instruments, and we remain positioned to benefit from this reversal. The Fund is leveraged and has a $50 million credit line provided by Fleet National Bank and State Street Bank and Trust Company. As of March 31, 2002, the Fund had drawn $22 million on the line; this reflects a reduction of $6 million since the Fund's prior fiscal year-end. Borrowings fluctuate depending on investment outlook and opportunities. As of March 31, 2002, the Fund's shares were priced at $4.38. This price reflected a premium of 11.7% to the Fund's net asset value of $3.92 per share. (The average premium of the Funds in the Lipper Leveraged Closed End universe was 14.9% as of March 31, 2002.) As of March 31, 2002, the Fund's monthly dividend rate of $0.0425 per share equated to an annualized yield of 11.6% relative to the stock price. This yield was significantly in excess of the US 10-Year Treasury rate of 5.40% on March 31, 2002. Our objective is to capture the attractive yields currently available in the high yield market and minimize credit losses. Given the amount of liquidity that the US has injected into the system through both monetary and fiscal policy, we are forecasting a stronger US economy starting in the second half of 2002. The combination of a stronger US economy, attractive high yield valuations, and continued interest in the high yield market (as evidenced by strong inflows to high yield mutual funds) bodes well for high yield returns going forward. We believe that the Fund is well-positioned to benefit from a turnaround in the US economy. I am pleased to be the Portfolio Manager of your Fund effective February 27, 2002. I assumed responsibility from my colleague, Catherine A. Smith following her retirement from Wellington Management Company, LLP. As always, we appreciate your interest in the Fund. Sincerely yours, Earl McEvoy Portfolio Manager Senior Vice President Wellington Management Company, LLP 2 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (Unaudited) Rate Date (000) (Note 1) ------------------------------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS--131.5% CORPORATE BONDS--130.1% ------------------------------------------------------------------------------------------------------------------------------ Aerospace/Defense--1.9% Moog, Inc., Sr. Sub. Notes, Ser. B Ba3 10.00% 5/01/06 $ 750 $ 772,500 Sequa Corp., Sr. Notes Ba3 9.00 8/01/09 400 400,000 ------------ 1,172,500 ------------------------------------------------------------------------------------------------------------------------------ Automotive--3.0% Accuride Corp., Sr. Sub. Notes Caa1 9.25 2/01/08 850 641,750 Dana Corp., Sr. Notes Ba3 10.125 3/15/10 125 128,750 Notes Ba3 9.00 8/15/11 1,100 1,089,000 ------------ 1,859,500 ------------------------------------------------------------------------------------------------------------------------------ Building & Related Industries--0.9% Nortek, Inc., Sr. Notes, Ser. B B1 9.125 9/01/07 250 257,500 Owens Corning, Notes D(c) 7.50 5/01/05 750(b) 292,500 ------------ 550,000 ------------------------------------------------------------------------------------------------------------------------------ Cable--9.4% Adelphia Communications Corp., Sr. Notes B2 10.875 10/01/10 250 240,000 Notes B2 10.25 6/15/11 1,300 1,176,500 Charter Communications Holdings LLC, Sr. Notes B2 10.00 4/01/09 1,000 960,000 Sr. Notes B2 9.625 11/15/09 335 318,250 Sr. Notes B2 11.125 1/15/11 285 287,137 Insight Midwest L.P., Sr. Notes B1 9.75 10/01/09 245 256,025 Sr. Notes B1 10.50 11/01/10 1,000 1,085,000 Mediacom Broadband LLC, Sr. Notes B2 11.00 7/15/13 1,000 1,105,000 Telewest Communications PLC, Sr. Notes (United Kingdom) Caa3 11.25 11/01/08 500(d) 250,000 United Pan-Europe Communications N.V. (Netherlands), Sr. Notes Ca 10.875 8/01/09 500(b)(d) 65,000 Sr. Notes, Ser. B Caa3 11.25 2/01/10 250(b)(d) 32,500 ------------ 5,775,412
-------------------------------------------------------------------------------- See Notes to Financial Statements. 3 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (Unaudited) Rate Date (000) (Note 1) ------------------------------------------------------------------------------------------------------------------------------ Chemicals--6.7% ARCO Chemical Co., Debs. Ba3 9.375% 12/15/05 $ 700 $ 710,500 Georgia Gulf Corp., Sr. Sub. Notes B2 10.375 11/01/07 750 806,250 Goodyear Tire & Rubber Co., Notes Baa3 8.50 3/15/07 400 403,713 Notes Baa3 7.857 8/15/11 310 298,458 Lyondell Chemical Co., Sr. Sec'd. Notes Ba3 9.50 12/15/08 140 142,100 Sr. Sub. Notes B2 10.875 5/01/09 655 641,900 Resolution Performance Products, Inc., Sr. Sub. Notes B3 13.50 11/15/10 1,000 1,120,000 ------------ 4,122,921 ------------------------------------------------------------------------------------------------------------------------------ Consumer Goods & Services--1.8% Bausch & Lomb, Inc., Notes Ba1 6.75 12/15/04 500 497,015 Corning Consumer Products Co., Sr. Sub. Notes Ca 9.625 5/01/08 1,500 196,875 Icon Health & Fitness, Inc., Sr. Sub. Notes B3 11.25 4/01/12 400 396,000 Polaroid Corp., Medium-Term Notes Ca 7.25 1/15/07 190(b) 9,500 ------------ 1,099,390 ------------------------------------------------------------------------------------------------------------------------------ Containers--3.3% Owens-Brockway Glass Container, Inc., Sr. Sec'd. Notes B2 8.875 2/15/09 500 510,000 Owens-Illinois, Inc., Sr. Notes B3 7.85 5/15/04 205 200,900 Sr. Notes B3 7.15 5/15/05 250 238,750 Sr. Notes B3 8.10 5/15/07 550 533,500 Silgan Holdings, Inc., Sr. Sub. Debs. B1 9.00 6/01/09 500 520,000 ------------ 2,003,150 ------------------------------------------------------------------------------------------------------------------------------ Energy & Related Goods & Services--6.5% Canadian Forest Oil Ltd., Sr. Sub. Notes (Canada) B1 8.75 9/15/07 275(d) 284,625 Clark R & M, Inc., Sr. Notes Ba3 8.625 8/15/08 750 705,000 Forest Oil Corp., Sr. Notes Ba3 8.00 6/15/08 727 743,357 Frontier Oil Corp., Sr. Notes B2 9.125 2/15/06 750 765,000 Magnum Hunter Resources, Inc., Sr. Notes B2 9.60 3/15/12 120 125,700 P & L Coal Holdings Corp., Sr. Notes Ba3 8.875 5/15/08 500 531,250 Parker Drilling Co., Sr. Notes, Ser. D B1 9.75 11/15/06 130 133,900 Pioneer Natural Resources Co., Sr. Notes Ba1 9.625 4/01/10 500 544,324 Tesoro Petroleum Corp., Sr. Sub. Notes B1 9.625 11/01/08 175 177,625 ------------ 4,010,781 ------------------------------------------------------------------------------------------------------------------------------ Financial Services--4.4% Conseco, Inc., Sr. Notes B2 10.75 6/15/08 650 318,500 Fairfax Financial Holdings Ltd., Notes (Canada) Ba2 7.375 3/15/06 485(d) 425,752
-------------------------------------------------------------------------------- See Notes to Financial Statements. 4 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (Unaudited) Rate Date (000) (Note 1) ------------------------------------------------------------------------------------------------------------------------------ Financial Services (cont'd.) GS Escrow Corp., Sr. Notes Ba1 7.125% 8/01/05 $ 750 $ 742,380 Ocwen Federal Savings Bank., Sub. Debs. B1 12.00 6/15/05 500 490,000 Western Financial Savings Bank, Sub. Cap. Debs. B1 8.875 8/01/07 750 704,607 ------------ 2,681,239 ------------------------------------------------------------------------------------------------------------------------------ Food & Lodging--1.6% Constellation Brands, Inc., Gtd. Sr. Sub. Notes Ba3 8.125 1/15/12 445 453,900 John Q. Hammons Hotels, First Mtge. Bonds B2 8.875 2/15/04 500 498,750 ------------ 952,650 ------------------------------------------------------------------------------------------------------------------------------ General Industrial--8.1% Allied Waste North America, Inc., Sr. Notes Ba3 7.625 1/01/06 600 589,500 Sr. Sub. Notes B2 10.00 8/01/09 750 759,375 International Wire Group, Inc., Sr. Sub. Notes, Ser. B Caa1 11.75 6/01/05 250 211,250 IT Group, Inc., Sr. Sub. Notes, Ser. B D(c) 11.25 4/01/09 500(b) 625(e) Juniper Networks, Inc., Sub. Notes, Conv. B2 4.75 3/15/07 1,250 887,500 Lucent Technologies, Inc., Notes B2 7.25 7/15/06 1,040 852,800 Notes B2 5.50 11/15/08 425 306,000 Nortel Networks Ltd., Notes (Canada) Ba3 6.125 2/15/06 750(d) 555,000 Numatics, Inc., Sr. Sub. Notes Caa2 9.625 4/01/08 160 82,400 WESCO Distribution, Inc., Sr. Sub. Notes B3 9.125 6/01/08 750 708,750 ------------ 4,953,200 ------------------------------------------------------------------------------------------------------------------------------ Grocery Stores--0.5% Pathmark Stores, Inc., Sr. Sub. Notes B2 8.75 2/01/12 300 309,000 ------------------------------------------------------------------------------------------------------------------------------ Health Care--14.1% Alaris Medical Systems, Inc., Sr. Sub. Notes Caa1 9.75 12/01/06 500 485,000 Sr. Sec'd. Notes, Ser. B B2 11.625 12/01/06 145 158,050 Athena Neurosciences Finance LLC, Sr. Notes Ba2 7.25 2/21/08 375 298,796 Beverly Enterprises, Inc., Sr. Notes B1 9.00 2/15/06 500 507,500 Sr. Notes B1 9.625 4/15/09 525 536,156 Bio-Rad Labs, Inc., Sr. Sub. Notes B2 11.625 2/15/07 750 838,125 Conmed Corp., Sr. Sub. Notes B3 9.00 3/15/08 1,100 1,123,375 Dade International, Inc., Sr. Sub. Notes C 11.125 5/01/06 1,225(b) 1,078,000 Manor Care, Inc., Sr. Notes Ba1 8.00 3/01/08 500 516,250
-------------------------------------------------------------------------------- See Notes to Financial Statements. 5 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (Unaudited) Rate Date (000) (Note 1) ------------------------------------------------------------------------------------------------------------------------------ Health Care (cont'd.) Radiologix, Inc., Sr. Notes B2 10.50% 12/15/08 $ 735 $ 746,025 Tenet Healthcare Corp., Sr. Sub. Notes, Ser. B Ba1 8.125 12/01/08 850 928,618 Triad Hospitals Holdings, Inc., Sr. Sub. Notes B2 11.00 5/15/09 855 955,463 Universal Hospital Services, Inc., Sr. Sub. Notes B3 10.25 3/01/08 500 485,000 ------------ 8,656,358 ------------------------------------------------------------------------------------------------------------------------------ Home Building & Real Estate--3.8% Beazer Homes USA, Inc., Sr. Notes Ba2 8.875 4/01/08 1,250 1,300,000 Ryland Group, Inc., Notes Ba3 8.25 4/01/08 750 761,250 Standard Pacific Corp., Sr. Notes Ba2 8.50 6/15/07 250 253,750 ------------ 2,315,000 ------------------------------------------------------------------------------------------------------------------------------ Media & Entertainment--13.7% Belo Corp., Sr. Notes Baa3 8.00 11/01/08 400 409,000 Corus Entertainment, Inc., Sr. Sub. Notes (Canada) B1 8.75 3/01/12 205(d) 211,663 EchoStar DBS Corp., Sr. Notes B1 9.125 1/15/09 1,275 1,313,250 Emmis Communications Corp., Sr. Sub. Notes B2 8.125 3/15/09 500 510,000 Entravision Communications Corp., Sr. Sub. Notes B3 8.125 3/15/09 110 111,100 Mail-Well Corp., Sr. Notes B1 9.625 3/15/12 165 169,950 PRIMEDIA, Inc., Sr. Notes B1 8.875 5/15/11 550 500,500 Quebecor Media, Inc., Sr. Notes (Canada) B2 11.125 7/15/11 1,500(d) 1,627,500 Rogers Communications, Inc., Sr. Notes (Canada) Ba1 8.875 7/15/07 500(d) 503,125 STC Broadcasting, Inc., Sr. Sub. Notes B3 11.00 3/15/07 350 362,687 Von Hoffman Press, Inc., Sr. Sub. Notes B3 10.875 5/15/07 550 517,687 Sr. Notes B2 10.25 3/15/09 345 350,606 World Color Press, Inc., Sr. Sub. Notes Baa2 8.375 11/15/08 750 766,792 Young Broadcasting, Inc., Sr. Sub. Notes B3 10.00 3/01/11 1,000 1,040,000 ------------ 8,393,860 ------------------------------------------------------------------------------------------------------------------------------ Metals--6.2% AK Steel Corp., Sr. Notes B1 9.125 12/15/06 500 521,250 Sr. Notes B1 7.875 2/15/09 500 503,750 Allegheny Technologies, Inc., Notes Baa1 8.375 12/15/11 750 733,751 Bayou Steel Corp., First Mtge. Notes B3 9.50 5/15/08 715 346,775 Century Aluminum Co., Sr. Sec'd. First Mtge. Notes Ba3 11.75 4/15/08 500 527,500 National Steel Corp., Mtge. Notes, Ser. D Caa2 9.875 3/01/09 500(b) 100,625 Steel Dynamics, Inc., Sr. Notes B2 9.50 3/15/09 60 62,400
-------------------------------------------------------------------------------- See Notes to Financial Statements. 6 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (Unaudited) Rate Date (000) (Note 1) ------------------------------------------------------------------------------------------------------------------------------ Metals (cont'd.) United States Steel LLC, Sr. Notes Ba3 10.75% 8/01/08 $ 875 $ 875,000 Weirton Steel Corp., Sr. Notes Ca 11.375 7/01/04 750(b) 116,250 ------------ 3,787,301 ------------------------------------------------------------------------------------------------------------------------------ Paper & Packaging--5.8% Boise Cascade Corp., Sr. Notes Baa3 7.50 2/01/08 340 336,518 Buckeye Technologies, Inc., Sr. Sub. Notes Caa1 8.50 12/15/05 475 427,500 Caraustar Industries, Inc., Sr. Sub. Notes Ba2 9.875 4/01/11 675 712,125 Graphic Packaging Corp., Sr. Sub. Notes B2 8.625 2/15/12 105 108,938 Millar Western Forest Products Ltd., Sr. Notes (Canada) B3 9.875 5/15/08 1,250(d) 1,193,750 Pacifica Papers, Inc., Sr. Notes (Canada) Ba2 10.00 3/15/09 750(d) 798,750 ------------ 3,577,581 ------------------------------------------------------------------------------------------------------------------------------ Retail--6.9% CSK Auto, Inc., Sr. Notes B2 12.00 6/15/06 195 206,700 Sr. Sub. Notes B3 11.00 11/01/06 750 705,000 Gap, Inc., Notes Ba3 8.80(f) 12/15/08 1,000 996,048 J.C. Penney, Inc., Notes Ba2 7.60 4/01/07 350 341,250 Levi Strauss & Co., Notes B2 11.625 1/15/08 850 886,125 Rite Aid Corp., Notes Caa3 7.125 1/15/07 1,500 1,080,000 ------------ 4,215,123 ------------------------------------------------------------------------------------------------------------------------------ Technology--11.7% Amkor Technologies, Inc., Sr. Notes B1 9.25 5/01/06 500 496,250 Sr. Sub. Notes B3 10.50 5/01/09 750 740,625 Avaya, Inc., Sr. Sec'd. Notes Ba2 11.125 4/01/09 400 392,000 Fairchild Semiconductor Corp., Sr. Sub. Notes B2 10.50 2/01/09 1,000 1,102,500 SCG Holdings Corp., Notes, Ser. B B3 12.00 8/01/09 870 639,450 Seagate Technology, Inc., Sr. Sub. Notes Ba3 12.50 11/15/07 950 1,078,250 Solectron Corp., Sr. Notes Ba1 9.625 2/15/09 825 783,750 Telecommunications Techniques Co., Sr. Sub. Notes Caa3 9.75 5/15/08 750 211,875 Viasystems, Inc., Sr. Sub. Notes Caa3 9.75 6/01/07 750 172,500 Sr. Sub. Notes, Ser. B Caa3 9.75 6/01/07 805 185,150 Xerox Capital Europe PLC, Gtd. Notes (United Kingdom) Ba1 5.875 5/15/04 750(d) 683,224 Xerox Corp., Sr. Notes Ba1 9.75 1/15/09 750 710,625 ------------ 7,196,199
-------------------------------------------------------------------------------- See Notes to Financial Statements. 7 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (Unaudited) Rate Date (000) (Note 1) ------------------------------------------------------------------------------------------------------------------------------ Telecommunications--2.7% Global Crossing Holdings Ltd. (Bermuda), Sr. Notes Ca 9.125% 11/15/06 $ 1,500(b)(d) $ 31,875 Sr. Notes Ca 9.625 5/15/08 500(b)(d) 10,625 Iridium LLC, Sr. Notes, Ser. B D(c) 14.00 7/15/05 750(b) 45,000 Gtd. Sr. Notes, Ser. D D(c) 10.875 7/15/05 500(b) 30,000 Level 3 Communications, Inc., Sr. Notes Caa3 11.00 3/15/08 100 46,000 Sr. Notes Caa3 11.25 3/15/10 500 225,000 McLeodUSA, Inc., Sr. Notes Ca 11.375 1/01/09 500(b) 125,000 Rogers Wireless, Inc., Sr. Sec'd. Notes (Canada) Baa3 9.625 5/01/11 800(d) 744,000 Williams Communications Group, Inc., Sr. Notes Ca 10.875 10/01/09 750 112,500 Sr. Notes Ca 11.875 8/01/10 1,750 262,500 ------------ 1,632,500 ------------------------------------------------------------------------------------------------------------------------------ Transportation--5.9% Air Canada, Inc., Sr. Notes (Canada) B3 10.25 3/15/11 1,000(d) 780,000 Atlas Air, Inc., Notes B1 10.75 8/01/05 810 729,000 Delta Airlines, Inc., Notes Ba3 7.90 12/15/09 880 848,661 Debs. Ba3 10.375 2/01/11 45 43,879 Kansas City Southern Railway Co., Sr. Notes Ba2 9.50 10/01/08 750 810,938 Northwest Airlines, Inc., Sr. Notes B2 8.875 6/01/06 290 276,112 Notes B2 9.875 3/15/07 165 163,350 ------------ 3,651,940 ------------------------------------------------------------------------------------------------------------------------------ Utilities--11.2% AES Corp., Sr. Notes Ba1 8.875 2/15/11 1,050 798,000 Avista Corp., Sr. Notes Ba1 9.75 6/01/08 980 1,028,254 Calpine Canada Energy Finance LLC (Canada), Sr. Notes Ba1 8.50 5/01/08 1,000(d) 797,500 Calpine Corp. Sr. Notes Ba1 8.625 8/15/10 500 395,000 Sr. Notes Ba1 8.50 2/15/11 400 319,000 CMS Energy Corp., Sub. Notes Ba3 7.625 11/15/04 175 175,000 Sr. Notes Ba3 9.875 10/15/07 1,000 1,081,880 Dynegy Holdings, Inc., Sr. Notes Baa3 8.125 3/15/05 350 358,427 IEBA-Invers Electric Corp., Notes (Argentina) CC(c) 9.00 9/16/04 1,000(b)(d) 30,000
-------------------------------------------------------------------------------- See Notes to Financial Statements. 8 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (Unaudited) Rate Date (000) (Note 1) ------------------------------------------------------------------------------------------------------------------------------ Utilities (cont'd.) Mirant Americas Generation LLC, Sr. Notes Ba1 7.20% 10/01/08 $ 750 $ 667,500 TNP Enterprises, Inc., Sr. Sub. Notes Ba3 10.25 4/01/10 500 530,000 Western Resources, Inc., Unsec'd. Sr. Notes Ba2 7.125 8/01/09 750 690,263 ------------ 6,870,824 ------------ Total long-term corporate bonds 79,786,429 ------------------------------------------------------------------------------------------------------------------------------ FOREIGN GOVERNMENT OBLIGATION--1.3% Republic of Brazil, Bonds B1 14.50 10/15/09 693(d) 777,037 ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS(a) Shares ---------- Mediq, Inc. -- -- -- 3,205 0(e) SF Holdings Group, Class C -- -- -- 219 0(e) ------------ Total common stocks 0 ------------------------------------------------------------------------------------------------------------------------------ PREFERRED STOCKS--0.1% SF Holdings Group, Inc., Exchangeable, PIK NR 13.75 -- 59 29,573 Exchangeable, Ser. B, PIK NR 13.75 -- 60 30,000 XO Communications, Inc., Exchangeable, Ser. B, PIK NR 13.50 -- 46 2(e) ------------ Total preferred stocks 59,575 ------------ Total long-term investments (cost $90,038,293) 80,623,041
------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT--3.8% REPURCHASE AGREEMENT Principal Amount (000) ---------- BNP Paribas, dated 3/28/02, due 4/1/02 in the amount of $2,344,469 (cost $2,344,000; collateralized by $1,817,000 U.S. Treasury Bonds, 8.75%, due 5/15/17, value of collateral including accrued interest is $2,393,646) -- 1.80 4/01/02 $ 2,344 2,344,000 ------------------------------------------------------------------------------------------------------------------------------ Total Investments--135.3% (cost $92,382,293; Note 3) 82,967,041 Liabilities in excess of other assets--(35.3)% (21,628,026) ------------ Net Assets--100% $ 61,339,015 ------------ ------------
-------------------------------------------------------------------------------- See Notes to Financial Statements. 9 Portfolio of Investments as of March 31, 2002 THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- (a)--Non-income producing securities. (b)-- Represents issuer in default on interest payments; non-income producing security. (c)--Standard & Poor's Rating. (d)--US$ denominated foreign bonds. (e)--Fair-valued security--value is determined by the Valuation Committee or Board of Directors in consultation with the investment adviser. (f)-- Variable rate security in which the coupon rate increases or decreases by .25 of 1% for each rating downgrade or upgrade by Moody's or Standard & Poor's. LLC--Limited Liability Company. L.P.--Limited Partnership. NR--Not rated by Moody's or Standard & Poor's. N.V.--Naamloze Vennootschap (Dutch Company). PIK--Payment in Kind. PLC--Public Limited Company (United Kingdom Limited Liability Company). -------------------------------------------------------------------------------- See Notes to Financial Statements. 10 Statement of Assets and Liabilities THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- Assets March 31, 2002 ------------------------------------------------------------------------------------------------------------------------------- Investments, at value (cost $92,382,293)...................................................................... $ 82,967,041 Cash.......................................................................................................... 137 Interest receivable........................................................................................... 2,289,000 Receivable for investments sold............................................................................... 268,960 Other assets.................................................................................................. 51,635 -------------- Total assets............................................................................................... 85,576,773 -------------- Liabilities Loan payable (Note 5)......................................................................................... 22,000,000 Payable for investments purchased............................................................................. 1,241,877 Dividends payable............................................................................................. 665,338 Accrued expenses.............................................................................................. 133,514 Loan interest payable (Note 5)................................................................................ 132,830 Deferred directors' fees...................................................................................... 27,494 Advisory fee payable.......................................................................................... 26,056 Administration fee payable.................................................................................... 10,422 Unrealized depreciation on forward currency contracts......................................................... 227 -------------- Total liabilities.......................................................................................... 24,237,758 -------------- Net Assets.................................................................................................... $ 61,339,015 -------------- -------------- Net assets were comprised of: Common stock, at par....................................................................................... $ 156,520 Paid-in capital in excess of par........................................................................... 131,610,304 -------------- 131,766,824 Overdistribution of net investment income.................................................................. (700,272) Accumulated net realized loss on investment and foreign currency transactions.............................. (60,312,125) Net unrealized depreciation on investments and foreign currencies.......................................... (9,415,412) -------------- Net assets, March 31, 2002................................................................................. $ 61,339,015 -------------- -------------- Net asset value per share ($61,339,015 / 15,651,955 shares of common stock issued and outstanding)............ $3.92 -------------- --------------
-------------------------------------------------------------------------------- See Notes to Financial Statements. 11 THE HIGH YIELD PLUS FUND, INC. Statement of Operations ------------------------------------------------------------ Year Ended March 31, Net Investment Income 2002 Income Interest.................................... $ 11,721,938 Dividends................................... 24,028 ------------ 11,745,966 ------------ Expenses Investment advisory fee..................... 339,545 Administration fee.......................... 135,818 Custodian's fees and expenses............... 112,000 Legal fees and expenses..................... 98,000 Reports to shareholders..................... 61,000 Transfer agent's fees and expenses.......... 38,000 Listing fee................................. 35,000 Insurance expense........................... 33,000 Audit fee................................... 30,000 Directors' fees and expenses................ 16,000 Miscellaneous............................... 2,833 ------------ Total operating expenses................. 901,196 Loan interest expense (Note 5).............. 1,262,531 ------------ Total expenses........................... 2,163,727 ------------ Net investment income.......................... 9,582,239 ------------ Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies Net realized gain (loss) on: Investment transactions..................... (29,529,784) Foreign currency transactions............... 14,249 ------------ (29,515,535) ------------ Net change in unrealized depreciation on: Investments................................. 13,854,817 Foreign currencies.......................... (10,787) ------------ 13,844,030 ------------ Net loss on investments and foreign currencies.................................. (15,671,505) ------------ Net Decrease in Net Assets Resulting from Operations...................... $ (6,089,266) ------------ ------------ THE HIGH YIELD PLUS FUND, INC. Statement of Cash Flows ------------------------------------------------------------ Year Ended Increase (Decrease) in Cash March 31, (Including Foreign Currency) 2002 Cash flows provided from operating activities Interest and dividends received (excluding discount and premium amortization of $2,443,334 and $848,832, respectively).... $ 10,616,522 Operating expenses paid...................... (1,162,511) Loan interest and commitment fee paid........ (1,143,196) Purchases of short-term portfolio investments............................... (2,344,000) Purchases of long-term portfolio investments............................... (70,966,330) Proceeds from disposition of long-term portfolio investments..................... 81,696,608 Other assets................................. 20,103 ------------ Net cash provided from operating activities................................ 16,717,196 ------------ Cash used for financing activities Net decrease in loan payable................. (6,000,000) Cash dividends paid (excluding reinvestment of dividends of $1,032,315)............... (10,619,569) ------------ Net cash used for financing activities....... (16,619,569) ------------ Net increase in cash......................... 97,627 Payable to custodian at beginning of year.... (97,490) ------------ Cash at end of year.......................... $ 137 ------------ ------------ Reconciliation of Net Decrease in Net Assets to Net Cash (Including Foreign Currency) Provided from Operating Activities Net decrease in net assets resulting from operations................................... $ (6,089,266) ------------ Decrease in investments......................... 7,103,509 Net realized loss on investment and foreign currency transactions........................ 29,515,535 Net increase in unrealized appreciation (depreciation) on investments and foreign currencies................................... (13,844,030) Increase in receivable for investments sold..... (14,703) Decrease in interest receivable................. 1,313,890 Decrease in other assets........................ 20,103 Decrease in payable for investments purchased... (1,145,862) Decrease in accrued expenses and other liabilities.................................. (141,980) ------------ Total adjustments............................ 22,806,462 ------------ Net cash provided from operating activities................................ $ 16,717,196 ------------ ------------ -------------------------------------------------------------------------------- See Notes to Financial Statements. 12 THE HIGH YIELD PLUS FUND, INC. Statement of Changes in Net Assets ------------------------------------------------------------ Year Ended March 31, Increase (Decrease) ------------------------------ in Net Assets 2002 2001 ------------ ------------ Operations Net investment income....... $ 9,582,239 $ 12,405,361 Net realized loss on investment and foreign currency transactions.... (29,515,535) (15,005,642) Net change in unrealized depreciation on investments and foreign currencies............... 13,844,030 (5,589,149) ------------ ------------ Net decrease in net assets resulting from operations............... (6,089,266) (8,189,430) Dividends from net investment income........ (11,197,187) (13,177,913) Distributions in excess of net investment income.... -- (185,760) Value of Fund shares issued to shareholders in reinvestment of dividends................ 1,032,315 934,538 ------------ ------------ Total decrease................. (16,254,138) (20,618,565) Net Assets Beginning of year.............. 77,593,153 98,211,718 ------------ ------------ End of year.................... $ 61,339,015 $ 77,593,153 ------------ ------------ ------------ ------------ THE HIGH YIELD PLUS FUND, INC. Notes to Financial Statements ------------------------------------------------------------ The High Yield Plus Fund, Inc. (the 'Fund') was organized in Maryland on February 3, 1988, as a diversified, closed-end management investment company. The Fund had no transactions until April 4, 1988, when it sold 11,000 shares of common stock for $102,300 to Wellington Management Company, LLP (the 'Investment Adviser'). Investment operations commenced on April 22, 1988. The Fund's primary objective is to provide a high level of current income to shareholders. The Fund seeks to achieve this objective through investment in publicly or privately offered high yield debt securities rated in the medium to lower categories by recognized rating services or nonrated securities of comparable quality. As a secondary investment objective, the Fund will seek capital appreciation, but only when consistent with its primary objective. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry or region. ------------------------------------------------------------ Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Securities Valuation: Portfolio securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued at the closing bid price or in the absence of such price, as determined in good faith by the Board of Directors of the Fund. Any security for which the primary market is on an exchange is valued at the last sales price on such exchange on the day of valuation or, if there was no sale on such day, the closing bid price. Securities for which no trades have taken place that day and unlisted securities for which market quotations are readily available are valued at the latest bid price. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. Repurchase Agreements: In connection with transactions in repurchase agreements with United States financial institutions, it is the Fund's policy that its custodian or designated subcustodians under triparty repurchase agreements, as the case may be, take possession of the underlying collateral securities, the value of which exceeds the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to ensure the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of -------------------------------------------------------------------------------- 13 Notes to Financial Statements THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- the security, realization of the collateral by the Fund may be delayed or limited. Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities--at the closing daily rate of exchange. (ii) purchases and sales of investment securities, income and expenses--at the rates of exchange prevailing on the respective dates of such transactions. Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the fiscal period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of long-term securities held at the end of the fiscal period. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of long-term portfolio securities sold during the fiscal period. Accordingly, realized foreign currency gains (losses) are included in the reported net realized gains (losses) on investment transactions. Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from the holding of foreign currencies, currency gains (losses) realized between the trade date and settlement date on securities transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains (losses) from valuing foreign currency denominated assets and liabilities (other than investments) at period end exchange rates are reflected as a component of net unrealized appreciation (depreciation) on investments and foreign currencies. Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin as a result of, among other factors, the possibility of political and economic instability and the level of governmental supervision and regulation of foreign securities markets. 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' or 'Payable to Custodian' in the Statement of Assets and Liabilities. Forward Currency Contracts: A forward currency contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. The Fund enters into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings or on specific receivables and payables denominated in a foreign currency. The contracts are valued daily at current forward exchange rates and any unrealized gain or loss is included in net unrealized appreciation or depreciation on investments. Gain (loss) is realized on the settlement date of the contract equal to the difference between the settlement value of the original and renegotiated forward contracts. This gain (loss), if any, is included in net realized gain (loss) on foreign currency transactions. Risks may arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) on sales of securities are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. The Fund amortizes discounts and premiums on purchases of debt securities as adjustments to interest income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. As required, effective April 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premiums on debt securities. Prior to April 1, 2001 the Fund did not amortize premiums on debt securities. Upon initial adoption, the Fund was required to adjust the cost of its fixed-income securities by the cumulative amounts that would have been recognized had the amortization been in effect from the purchase date of each holding. Adopting this accounting principle does not affect the Fund's net asset value, but changes the classification of certain amounts between interest income and unrealized gain (loss) in the Statement of Operations. The cumulative adjustment upon adoption resulted in an increase to overdistributions from net investment income and a decrease to unrealized depreciation on investments of $848,071. Dividends and Distributions: The Fund expects to pay dividends of net investment income monthly and distributions of net realized capital and -------------------------------------------------------------------------------- 14 Notes to Financial Statements THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- currency gains, if any, annually. Dividends and distributions are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. Federal Income 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 net income and capital gains, if any, to its shareholders. Therefore, no federal income tax provision is required. ------------------------------------------------------------ Note 2. Agreements The Fund has agreements with the Investment Adviser and with Prudential Investments 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, 2002, aggregated $69,563,417 and $80,628,245, respectively. At March 31, 2002, the Fund had an outstanding forward currency contract to sell foreign currencies as follows: Foreign Currency Settlement Date Current Unrealized Sale Contract Receivable Value Depreciation ------------------ --------------- -------- --------------- Euros, expiring 4/22/02 $ 203,685 $203,912 $ (227) --------------- -------- ------- --------------- -------- ------- ------------------------------------------------------------ Note 4. Distributions and Tax Information Distributions to shareholders, which are determined in accordance with federal income tax regulations and which may differ from generally accepted accounting principles, are recorded on the ex-dividend date. In order to present undistributed net investment income (loss) and accumulated net realized gains (losses) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital in excess of par, undistributed net investment income (loss) and accumulated net realized gain (loss) on investments. For the year ended March 31, 2002, the adjustment was to decrease overdistribution of net investment income by $1,944,348, increase accumulated net realized losses by $1,832,355 and decrease paid-in capital by $111,993 due primarily to the federal income tax treatment of net foreign exchange losses, interest income on defaulted securities and certain other differences between financial and tax reporting. Net investment income, net realized losses and net assets were not affected by this change. For the year ended March 31, 2002, the tax character of total dividends paid of $11,197,187 was ordinary income. As of March 31, 2002, the Fund did not have any tax basis accumulated undistributed net investment income or accumulated net realized gains. The tax basis differs from the amount shown on the Statement of Assets and Liabilities primarily due to the tax treatment of certain securities in default and other cumulative timing differences. In addition, the capital loss carryforward was approximately $44,941,000, of which $1,337,000 expires in 2003, $1,806,000 expires in 2004, $500,000 expires in 2007, $8,206,000 expires in 2008, $8,395,000 expires in 2009 and $24,697,000 expires in 2010. Accordingly, no capital gains distribution is expected to be paid to shareholders until net gains have been realized in excess of such carryfoward. The capital loss carryforward differs from the amount on the Statement of Assets and Liabilities primarily due to the Fund electing to treat post-October capital losses of approximately $14,591,000 and post-October currency losses of approximately $35,200 as having occurred in the following fiscal year and differences in the treatment of discount and premium amortization for book and tax purposes. The United States federal income tax basis of the Fund's investments and the net unrealized depreciation as of March 31, 2002 was as follows: Tax Basis of Net Unrealized Investments Appreciation Depreciation Depreciation ------------------ ------------ ------------- -------------- $93,162,304 $3,641,795 $(13,837,058 ) $(10,195,263) The difference between book basis and tax basis was attributable to deferred losses on wash sales and differences in the treatment of premium amortization for book and tax purposes. -------------------------------------------------------------------------------- 15 Notes to Financial Statements THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- Note 5. Borrowings The Fund has a credit agreement with unaffiliated lenders. The maximum commitment under this agreement is $50,000,000. Interest on any such borrowings is based on market rates and is payable at maturity. The Fund may utilize these borrowings (leverage) in order to increase the potential for gain on amounts invested. There can be no guarantee that these gains will be realized. There are increased risks associated with the use of leverage. The average daily balance outstanding during the year ended March 31, 2002 was $27,753,425 at a weighted average interest rate of 4.21%. The maximum face amount of borrowings outstanding at any month-end during the year ended March 31, 2002 was $31,000,000. The current borrowings of $22,000,000 (at a weighted average interest rate of 2.83%) mature throughout the period from April 1, 2002 to April 2, 2002. The Fund pays 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. Effective April 2, 2002, under the renewed credit agreement with unaffiliated lenders, the interest rate spread on any of the Fund's borrowings will be equal to the Eurodollar Loan Rate or Federal Funds Rate plus 0.750%. Under the previous credit agreement, this spread was equal to 0.625%. All other terms and conditions remain unchanged. The renewed credit agreement expires on April 1, 2003. ------------------------------------------------------------ Note 6. Capital There are 100 million shares of common stock authorized at $.01 par value per share. During the years ended March 31, 2002 and March 31, 2001, the Fund issued 203,297 and 157,754 shares in connection with reinvestment of dividends, respectively. ------------------------------------------------------------ Note 7. Dividends On February 26, 2002, the Board of Directors of the Fund declared dividends of $0.0425 per share payable on April 8, May 10 and June 10 to shareholders of record on March 29, April 30 and May 31, respectively. On May 21, 2002, the Board of Directors of the Fund declared dividends of $0.0325 per share payable on July 8, August 12 and September 9 to shareholders of record on June 28, July 31 and August 30, respectively. -------------------------------------------------------------------------------- 16 Financial Highlights THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Year Ended March 31, ------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........................ $ 5.02 $ 6.42 $ 7.36 $ 9.21 $ 8.54 --------- -------- -------- -------- -------- Income from investment operations Net investment income..................................... .62 .81 .89 .88 .84 Net realized and unrealized gain (loss) on investments.... (1.00) (1.34) (.94) (1.59) .67 --------- -------- -------- -------- -------- Total from investment operations....................... (.38) (.53) (.05) (.71) 1.51 --------- -------- -------- -------- -------- Less dividends and distributions Dividends from net investment income...................... (.72) (.86) (.89) (.88) (.84) Distributions in excess of net investment income.......... -- (.01) -- -- -- --------- -------- -------- -------- -------- Total dividends........................................ (.72) (.87) (.89) (.88) (.84) --------- -------- -------- -------- -------- Capital charge in respect to issuance of shares........... -- -- -- (.26) -- --------- -------- -------- -------- -------- Net asset value, end of year(a)........................... $ 3.92 $ 5.02 $ 6.42 $ 7.36 $ 9.21 --------- -------- -------- -------- -------- --------- -------- -------- -------- -------- Market price per share, end of year(a).................... $ 4.38 $ 6.20 $ 6.1875 $ 7.1875 $ 9.125 --------- -------- -------- -------- -------- --------- -------- -------- -------- -------- TOTAL INVESTMENT RETURN(b):............................... (19.20)% 15.49% (2.96)% (12.36)% 11.25% --------- -------- -------- -------- -------- --------- -------- -------- -------- -------- RATIO/SUPPLEMENTAL DATA: Net assets, end of year (000 omitted)..................... $61,339 $ 77,593 $ 98,212 $111,993 $104,558 Average net assets (000 omitted).......................... $67,722 $ 88,620 $107,803 $ 94,437 $100,766 Ratio to average net assets: Expenses, before loan interest and commitment fees..... 1.33% 1.26% 1.08% 1.11% 1.07% Total expenses......................................... 3.19% 3.92% 3.47% 3.14% 2.44% Net investment income.................................. 14.15% 14.00% 12.60% 11.60% 9.41% Portfolio turnover rate................................... 76% 68% 83% 94% 112% Total debt outstanding at end of year (000 omitted)....... $22,000 $ 28,000 $ 42,000 $ 35,000 $ 30,000 Asset coverage per $1,000 of debt outstanding............. $ 3,788 $ 3,771 $ 3,338 $ 4,204 $ 4,485
--------------- (a) NAV and market value are published in The Wall Street Journal each Monday. (b) Total investment return is calculated assuming a purchase of common stock at the current market value on the first day and a sale at the current market value on the last day of each year reported. Dividends and distributions are assumed for purposes of this calculation to be reinvested at prices obtained under the dividend reinvestment plan. This calculation does not reflect brokerage commissions. Contained above is selected data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data for the year indicated. This information has been determined based upon information provided in the financial statements and market price data for the Fund's shares. -------------------------------------------------------------------------------- See Notes to Financial Statements. 17 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, 2002, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. 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 audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, 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, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York May 21, 2002 -------------------------------------------------------------------------------- 18 Tax Information (Unaudited) THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- We are required by the Internal Revenue Code to advise you within 60 days of the Fund's fiscal year end (March 31, 2002) as to the federal tax status of dividends and distributions paid by the Fund during such fiscal year. Accordingly, we are advising you that during the fiscal year ended March 31, 2002, the Fund paid dividends of $.72 per share, which are taxable as ordinary income. In January 2003, shareholders will receive a Form 1099-DIV or substitute Form 1099-DIV which reflects the amount of dividends to be used by calendar year taxpayers on their 2002 federal income tax returns. Shareholders are advised to consult their own tax advisers with respect to the tax consequences of their investment in the Fund. 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 Company (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. -------------------------------------------------------------------------------- 19 Management of the Fund (Unaudited) THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- Information pertaining to the Directors of the Fund is set forth below. Directors
Term of Office Position and Length Name, Address and Age With Fund of Time Served* ---------------------------------------------------------------------- Eugene C. Dorsey (75) Director Since 1996 2010 Harbourside Drive, Pound2003 (Class I) Longboat Key, FL 34228 Robert E. La Blanc (68) Director Since 1999 323 Highland Avenue (Class II) Ridgewood, NJ 07450 Principal Occupations and Other Name, Address and Age Directorships Held** ------------------------------------ Eugene C. Dorsey (75) Retired. Director or Trustee of 78 2010 Harbourside Drive, Pound2003 portfolios within the Prudential Fund Longboat Key, FL 34228 Complex and Director of First Financial Fund, Inc.; formerly President, Chief Executive Officer and Trustee, Gannett Foundation (now Freedom Forum) (1981-1989); former publisher of four Gannett newspapers and Vice President of Gannett Co., Inc. (publishing) (1978-1981); past Chairman, Independent Sector, Washington, D.C. (national coalition of philanthropic organizations) (1989-1992); and former Chairman of the American Council for the Arts; and former Director, Advisory Board of Chase Manhattan Bank of Rochester. Robert E. La Blanc (68) President of Robert E. La Blanc 323 Highland Avenue Associates, Inc. (information Ridgewood, NJ 07450 technologies consulting) (since 1981); Director or Trustee of 74 portfolios within the Prudential Fund Complex; Director of First Financial Fund, Inc.; formerly Vice-Chairman of Continental Telecom, Inc. (1979-1981); formerly General Partner at Salomon Brothers (1969-1979); Director of Salient 3 Communications, Inc. (telecommunications). Storage Technology Corp. (computer equipment), Titan Corp. (electronics), and Chartered Semiconductor Manufacturing, Ltd. (semiconductors); and Trustee of Manhattan College.
-------------------------------------------------------------------------------- 20 Management of the Fund (Unaudited) THE HIGH YIELD PLUS FUND, INC. --------------------------------------------------------------------------------
Term of Office Position and Length Name, Address and Age With Fund of Time Served* ---------------------------------------------------------------------- Douglas H. McCorkindale (62) Director Since 1996 7950 Jones Branch Drive (Class II) McLean, VA 22107 Thomas T. Mooney (60)*** Director, Since 1988 55 St. Paul Street President and (as Director) Rochester, NY 14604 Treasurer (Class III) Clay T. Whitehead (63) Director Since 2000 P.O. Box 8090 (Class III) McLean, VA 22106 Principal Occupations During Past 5 Years and Other Name, Address and Age Directorships Held** ------------------------------------ Douglas H. McCorkindale (62) Chairman, President and CEO of Gannett 7950 Jones Branch Drive Co., Inc. (publishing and media) (since McLean, VA 22107 February 2001); Director or Trustee of 75 portfolios within the Prudential Fund Complex; previously President and CEO of Gannett Co., Inc. (June 2000-January 2001) and Vice Chairman of Gannett Co., Inc. (1984-1997); Director of Lockheed Martin Corp. (aerospace), Continental Airlines, Inc., and Mutual Insurance Company, Ltd. Thomas T. Mooney (60)*** President of the Greater Rochester Metro 55 St. Paul Street Chamber of Commerce (since 1976); Rochester, NY 14604 Director or Trustee 95 portfolios within the Prudential Fund Complex; President, Director and Treasurer of First Financial Fund, Inc.; former Rochester City Manager (during 1973); Trustee of Center for Governmental Research, Inc. (volunteer consulting); and Director of Blue Cross of Rochester, Executive Service Corps of Rochester, Monroe County Water Authority and Rural/Metro Medical Services, Inc. (ambulance service). Clay T. Whitehead (63) President of Clay Whitehead Associates P.O. Box 8090 (telecommunications) (since 1987) and McLean, VA 22106 National Exchange Inc. (new business development firm) (since May 1983); Director or Trustee of 91 portfolios within the Prudential Fund Complex; Director of First Financial Fund, Inc., GTC Telecom, Inc. (telecommunications), and Crosswalk.com (website).
-------------------------------------------------------------------------------- 21 Management of the Fund (Unaudited) THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- Information pertaining to the officers of the Fund, other than Mr. Mooney (who is listed above), is set forth below. Officers
Term of Office Position and Length Name, Address and Age With Fund of Time Served* ---------------------------------------------------------------------- Arthur J. Brown (53) Secretary Since 1986 1800 Massachusetts Avenue, NW Washington, D.C. 20036 R. Charles Miller (44) Assistant Since 1999 1800 Massachusetts Avenue, NW Secretary Washington, D.C. 20036 Principal Occupations Name, Address and Age During Past 5 Years ------------------------------------ Arthur J. Brown (53) Partner, Kirkpatrick & Lockhart LLP (law 1800 Massachusetts Avenue, NW firm and counsel to the Fund) Washington, D.C. 20036 R. Charles Miller (44) Partner, Kirkpatrick & Lockhart LLP 1800 Massachusetts Avenue, NW Washington, D.C. 20036
------------------ * The Board of Directors is divided into three classes, each of which has three year terms. Class II's term expires this year. Officers are generally elected by the Board to one year terms. ** This column includes only directorships of companies required to report to the Securities and Exchange Commission under the Securities Exchange Act of 1934 (that is, 'public companies') or other investment companies registered under the Investment Company Act of 1940 ('1940 Act'). Each Director of the Fund, except Mr. McCorkindale, oversees three other portfolios within the Fund's 'Fund Complex'. The Fund's Fund Complex consists of a group of investment companies and series of investment companies that are advised by the Investment Adviser. *** Indicates an 'interested person' of the Fund, as defined in the 1940 Act. Mr. Mooney is deemed to be an 'interested person' solely by reason of his service as an officer of the Fund.
Revised Investment Policy (Unaudited) THE HIGH YIELD PLUS FUND, INC. -------------------------------------------------------------------------------- On May 21, 2002, the Board of Directors unanimously approved a revised investment policy for the Fund in order to comply with new Rule 35d-1 under the 1940 Act (commonly known as the 'names rule'). The names rule requires many funds that have names that signify certain investments to have an investment policy requiring that 80% of their assets be invested in such investments. As the Fund's name includes the phrase 'high yield,' the Fund's current policy to invest 65% of its assets in high yield securities has been revised to read as follows: 'Under normal circumstances, the Fund will invest at least 80% of its assets (net assets, plus the amount of any borrowings for investment purposes) in high yield debt securities that are rated below investment grade, consisting of securities rated either below BBB by Standard & Poor's or below Baa by Moody's Investors Service, Inc., or non-rated high yield debt securities deemed by the Fund's investment adviser to be of comparable quality.' This revised policy also reflects a change in the ratings of the securities in which the Fund will invest based upon SEC positions on the definition of high yield securities. The Investment Adviser expects the Fund to be in compliance with this revised policy by the July 31, 2002 effective date of this revised policy. -------------------------------------------------------------------------------- 22 This page intentionally left blank Directors Eugene C. Dorsey Robert E. La Blanc Douglas H. McCorkindale Thomas T. Mooney Clay T. Whitehead Investment Adviser Wellington Management Company, llp 75 State Street Boston, MA 02109 Administrator Prudential Investments LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Custodian and Transfer Agent State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Legal Counsel Kirkpatrick & Lockhart LLP 1800 Massachusetts Avenue, N.W. Washington, D.C. 20036 Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that the Fund may purchase, from time to time, shares of its common stock at market prices. The views expressed in this report and the information about the Fund's portfolio holdings are for the period covered by this report and are subject to change thereafter. This report is for stockholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares. The High Yield Plus Fund, Inc. Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 For information call toll-free (800) 451-6788 429906100