PROSPECTUS November 10, 2005
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GLOBAL HIGH INCOME DOLLAR FUND INC.
6,509,889 SHARES
ISSUEABLE UPON EXERCISE OF NON-TRANSFERABLE RIGHTS TO
SUBSCRIBE FOR SUCH SHARES
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Global High Income Dollar Fund Inc. (the "Fund") is issuing non-transferable
rights ("Rights") to its shareholders of record ("Shareholders") as of the close
of business on November 10, 2005. These Rights will allow you to subscribe for
one (1) share of common stock ("Share") of the Fund for each three (3) Rights
held (the "Offer"). You will receive one Right for each whole Share that you
hold of record as of November 10, 2005, rounded up to the nearest number of
Rights evenly divisible by three. The Fund will not issue fractional Shares. The
Rights will not be listed for trading on the New York Stock Exchange or any
other exchange. You may also purchase Shares not acquired by other Shareholders
subject to certain limitations and subject to allotment as described in the
Prospectus.
THE SUBSCRIPTION PRICE PER SHARE (THE "SUBSCRIPTION PRICE") WILL BE THE GREATER
OF THE (i) NET ASSET VALUE ("NAV") PER SHARE ON DECEMBER 20, 2005 (THE
"EXPIRATION DATE") OR (II) 95% OF THE VOLUME WEIGHTED AVERAGE SHARE PRICE ON THE
NEW YORK STOCK EXCHANGE ("NYSE") ON THE EXPIRATION DATE AND THE FOUR PRECEDING
BUSINESS DAYS.
RIGHTS MAY BE EXERCISED AT ANY TIME UNTIL 5:00 P.M., EASTERN TIME, ON
DECEMBER 20, 2005, UNLESS THE OFFER IS EXTENDED AS DISCUSSED IN THIS
PROSPECTUS. Since the Expiration Date will be December 20, 2005, (unless the
Fund extends the subscription period), Shareholders who choose to exercise their
Rights will not know the Subscription Price at the time they exercise their
Rights. For additional information regarding the Offer, please call The Altman
Group, Inc. at 800-780 7438.
As a result of the terms of the Offer, Shareholders who do not fully exercise
their Rights, including the Over-Subscription Privilege described in the section
of this Prospectus entitled "The Offer--Over-Subscription Privilege," will, upon
the completion of the Offer, own a smaller proportional interest in the Fund
than they owned before the Offer. See "The Offer." The Fund is a
non-diversified, closed-end management investment company whose shares of common
stock are listed and traded on the NYSE under the symbol "GHI." The Fund's
primary investment objective is to achieve a high level of current income. As a
secondary objective, the Fund seeks capital appreciation, to the extent
consistent with its primary objective. Under normal market conditions, the Fund
invests at least 65% of its total assets in debt securities of issuers located
in emerging market countries. Under normal market conditions, the Fund invests
at least 80% of its net assets in US dollar-denominated debt securities. The
Fund may also invest up to 20% of its net assets in non-US dollar-denominated
debt securities under normal circumstances.
This Prospectus concisely sets forth certain information an investor should know
before investing. You should read this Prospectus and retain it for future
reference. A Statement of Additional Information ("SAI"), dated November 10,
2005, containing additional information about the Fund has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference in
its entirety into this Prospectus. A Table of Contents for the SAI is set forth
on page 56 of this Prospectus. A copy of the SAI can be obtained without charge
by writing to the Fund or by calling The Altman Group, Inc. at 800-780 7438.
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual report to shareholders. A copy of the annual or
semi-annual report can be obtained without charge by writing the Fund or by
calling the Fund at 800-647 1568 or from the UBS Global Asset Management Web
site at http://www.ubs.com/globalam. (The UBS Global Asset Management Web site
does not contain SAIs for closed-end funds because of limited interest in that
type of document.) The SEC maintains an Internet Web site (http://www.sec.gov)
that contains the SAI, material incorporated by reference and other information
regarding the Fund. To request general information about the Fund or make other
inquiries, you should contact the UBS Global Asset Management Closed-End Funds
Desk at 888-793 8637; however, this number should not be used for questions
relating to the Offer. If you have questions regarding the Offer, please contact
The Altman Group, Inc. at 800-780 7438.
AS WITH ALL INVESTMENT COMPANIES, NEITHER THE SEC NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS COMPLETE OR ACCURATE. TO STATE OTHERWISE IS A CRIME.
Estimated Proceeds,
Estimated Estimated before expenses,
Subscription Price(1) Sales Load to the Fund(2)
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Per Share $ 16.75 $ 0 $ 16.75
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Total Maximum(3) $ 109,040,641 $ 0 $ 109,040,641
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(FOOTNOTES SET FORTH ON NEXT PAGE)
(CONTINUED FROM PREVIOUS PAGE)
The Fund adopted a managed distribution policy in December 1999. Pursuant to the
policy as in effect from December 1999 through early May 2005, the Fund made
regular monthly distributions at an annualized rate equal to 11% of the Fund's
net asset value, as determined as of the last day on which the New York Stock
Exchange is open for trading during the first week of that month. Beginning with
the June 2005 monthly distribution, the annualized rate for distributions
pursuant to the policy was reduced by the Fund's Board of Directors (the
"Board") from 11% to 9%. The Board periodically receives recommendations from
the Fund's investment advisor, UBS Global Asset Management (US) Inc., and no
less frequently than annually the Board will reassess the annualized percentage
of net assets at which the Fund's monthly distributions will be made. The Fund's
Board may change or terminate the managed distribution policy at any time; any
such change or termination may have an adverse effect on the market price for
the Fund's shares.
To the extent that the Fund's taxable income in any fiscal year exceeds the
aggregate amount distributed based on a fixed percentage of its net asset value,
the Fund would make an additional distribution in the amount of that excess near
the end of the fiscal year. To the extent that the aggregate amount distributed
by the Fund based on a fixed percentage of its net asset value exceeds its
current and accumulated earnings and profits, the amount of that excess would
constitute a return of capital or net realized capital gains for tax purposes.
The actual sources of the Fund's monthly distributions may be net investment
income, net realized capital gains, return of capital or a combination of the
foregoing and may be subject to retroactive recharacterization at the end of the
Fund's fiscal year based on tax regulations. The actual amounts attributable to
each of these sources will be reported to shareholders in January of each year
on Form 1099-DIV.
The Fund announced the Offer after the close of trading on the NYSE on
August 17, 2005. The NAV at the close of business on August 17, 2005 and
November 10, 2005 was $15.73 and $15.84, respectively, and the last reported
sales price of a Share on the NYSE on those dates was $17.55 and $16.42,
respectively.
The Fund may increase the number of Shares subject to subscription by up to 25%,
or up to an additional 1,627,472 Shares, for an aggregate total of 8,137,361
Shares.
Information about the Fund can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Call 202-942 8090 for information on the
operation of the Public Reference Room. This information is also available on
the SEC's Internet site at HTTP://WWW.SEC.GOV, and copies may be obtained upon
payment of a duplicating fee by writing the Public Reference Section of the
Securities and Exchange Commission, Washington, DC 20549-0102.
(FOOTNOTES FROM PREVIOUS PAGE)
(1) Estimated on the basis of the volume weighted share price of a Share on the
NYSE on November 10, 2005 and the four preceding business days and prior
recent trading history. The Fund may increase the number of Shares subject
to subscription by up to 25% of the Shares offered hereby, or up to an
additional 1,627,472 Shares, for an aggregate total of 8,137,361 Shares. If
the Fund increases the number of Shares subject to subscription by 25%, the
total maximum Estimated Subscription Price will be approximately
$136,300,797 and the total maximum Estimated Proceeds, before expenses, to
the Fund will be approximately $136,300,797. No sales load will be charged
by the Fund in connection with this Offer. However, Shareholders that
choose to exercise their Rights through broker-dealers, banks and nominees
may incur a servicing fee charged by such broker-dealer, bank or nominee.
(2) Before deduction of expenses related to the Offer incurred by the Fund,
estimated at approximately $389,000.
(3) Assumes all Rights are exercised at the Estimated Subscription Price.
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PROSPECTUS SUMMARY
YOU SHOULD CONSIDER THE MATTERS DISCUSSED IN THIS SUMMARY BEFORE INVESTING
IN THE FUND THROUGH THE OFFER. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN
THIS PROSPECTUS.
THE OFFER
THE OFFER......................................... Global High Income Dollar Fund Inc. (the "Fund")
is issuing to its shareholders of record
("Shareholders") as of the close of business on
November 10, 2005 (the "Record Date") non-
transferable rights ("Rights") to subscribe for an
aggregate of 6,509,889 shares of common stock
("Shares") of the Fund (the "Offer"). You will
receive one Right for each whole Share you hold as
of the Record Date, rounded up to the nearest
number of Rights evenly divisible by three. You
may subscribe for one (1) Share for each three
(3) Rights you hold (the "Primary Subscription").
SUBSCRIPTION PRICE................................ The subscription price per Share (the
"Subscription Price") will be the greater of the
(i) net asset value ("NAV") per share on
December 20, 2005 (the "Expiration Date") or
(ii) 95% of the volume weighted average share
price on the New York Stock Exchange on the
Expiration Date and the four preceding business
days. See "The Offer--Subscription Price."
SUBSCRIPTION PERIOD............................... Rights may be exercised at any time during the
subscription period (the "Subscription Period"),
which starts on November 10, 2005 and ends at
5:00 p.m., Eastern time, on December 20, 2005. See
"The Offer--Terms of the Offer."
OVER-SUBSCRIPTION PRIVILEGE....................... The Fund may, at its discretion, issue up to an
additional 25% of the Shares in the Offer to honor
over-subscription requests if there are not enough
Shares available from the Primary Subscription to
honor all over-subscription requests (the "Over-
Subscription Privilege"). If sufficient Shares are
not available to honor all over-subscriptions, the
available Shares will be allocated among those who
over-subscribe based on the number of Rights
originally issued to them by the Fund, so that the
number of Shares issued to Shareholders who
subscribe pursuant to the Over-Subscription
Privilege will generally be in proportion to the
number of Shares owned by them in the Fund on the
Record Date. The allocation process may involve a
series of allocations to assure that the total
number of Shares available for over-subscriptions
is distributed on a pro-rata basis. See "The
Offer--Over-Subscription Privilege."
FRACTIONAL SHARES................................. Fractional Shares will not be issued upon the
exercise of Rights. In the case of Shares held of
record by a broker-dealer, bank or other financial
intermediary (each, a "Nominee"), the number of
Rights issued to the Nominee will be adjusted to
permit rounding up (to the nearest number of
Rights evenly divisible by three) of the Rights to
be received by each of the beneficial owners for
1
whom it is the holder of record only if the
Nominee provides to the Fund, on or before the
close of business on December 16, 2005, a written
representation of the number of Rights required
for such rounding. See "The Offer--Terms of the
Offer."
PURPOSE OF THE OFFER.............................. The Offer seeks to provide existing Fund
Shareholders with the opportunity to purchase
additional Shares at a price below market value.
The Fund's investment advisor, UBS Global Asset
Management (US) Inc. ("UBS Global AM"), believes
that increasing the Fund's assets through the
Offer will benefit the Fund and its Shareholders
by allowing the Fund to take further advantage of
available investment opportunities in a market
environment believed to be conducive for investing
and to reposition the Fund's portfolio in a more
efficient manner. While there can be no assurance
that any benefits will be realized, increasing the
Fund's investment assets through the Offer is
intended to:
- allow the Fund to increase its investments at a
time when the Fund's investment advisor
believes that the market is conducive for
investing;
- allow repositioning of the portfolio in a more
efficient manner;
- provide the Fund with the ability to make
additional investments without selling current
investments if otherwise not desirable;
- marginally reduce the per Share expense ratio;
and
- possibly increase the NAV of the Fund.
The Offer allows you the opportunity to purchase
additional Shares of the Fund at a price that will
be below market value at the Expiration Date. See
"The Offer--Purpose of the Offer."
NOTICE OF NAV DECLINE
OR INCREASE..................................... The Fund will suspend the Offer until it amends
this Prospectus if, after the effective date of
this Prospectus, the Fund's NAV declines more than
10% from its NAV as of that date or the NAV
increases to an amount greater than the net
proceeds. If that occurs, the Fund will notify
Shareholders of the decline or increase and permit
Exercising Shareholders (as defined herein) to
cancel exercise of their Rights. Shareholders will
have their payment for additional shares returned
to them if they opt to cancel the exercise of
their Rights. See "The Offer--Notice of NAV
Decline or Increase."
HOW TO OBTAIN SUBSCRIPTION INFORMATION............ - Contact your broker, bank or trust company.
- Contact The Altman Group, Inc. (the
"Information Agent") toll-free at 800-780 7438.
2
HOW TO SUBSCRIBE.................................. You may subscribe in one of two ways:
- If your Shares are held in a brokerage, bank or
trust account, have your broker, bank or trust
company deliver a Notice of Guaranteed Delivery
to the Subscription Agent by the Expiration
Date. See "The Offer--Exercise of Rights" and
"The Offer--Payment for Shares."
- If you own Shares directly (I.E., not through a
broker or bank), deliver a completed Exercise
Form and payment to Colbent Corporation (the
"Subscription Agent") by the Expiration Date.
TAX CONSEQUENCES.................................. For Federal income tax purposes, neither the
receipt nor the exercise of the Rights will result
in taxable income to Shareholders. You will not
realize a taxable loss if your Rights expire
without being exercised. See "The Offer--Certain
Federal Income Tax Consequences of the Offer."
USE OF PROCEEDS................................... The proceeds of the Offer will be invested in
accordance with the Fund's investment objectives
and policies. Investment of the proceeds is
expected to take up to one month from their
receipt by the Fund, but in no event later than
three months, depending on market conditions and
the availability of appropriate securities. See
"Use of Proceeds."
IMPORTANT DATES TO REMEMBER
Record Date....................................... November 10, 2005
Subscription Period*.............................. November 10 - December 20, 2005
Deadline for delivery of Exercise Form together
with payment of Estimated Subscription Price or
for delivery of Notice of Guaranteed Delivery... December 20, 2005*
Expiration Date................................... December 20, 2005*
Deadline for payment of final Subscription Price
pursuant to Notice of Guaranteed Delivery....... December 23, 2005*
Confirmation Date to Registered Shareholders**.... December 27, 2005*
For Registered Shareholder Purchases--deadline for
payment of unpaid balance if final Subscription
Price is higher than Estimated Subscription
Price........................................... December 30, 2005*
-------------------
* Unless the Offer is extended.
** Registered Shareholders are those shareholders who are the record owners of
Fund shares (that is, their names appear directly on the records of the
Fund's transfer agent) and whose shares are not held through a
broker-dealer or other nominee or intermediary.
3
THE FUND
THE FUND.......................................... The Fund is a non-diversified, closed-end
management investment company. The Fund was
incorporated under the laws of the State of
Maryland on February 23, 1993 and commenced
operations on October 8, 1993. As of November 10,
2005, the Fund had 19,439,667 Shares outstanding.
Shares of the Fund are traded on the NYSE under
the symbol "GHI." As of November 10, 2005, the
Fund's NAV was $15.84 and the Fund's last reported
sale price of a Share on the NYSE was $16.42. See
"The Fund."
DISTRIBUTIONS..................................... The Fund's Board adopted a managed distribution
policy in December 1999. Pursuant to the policy as
in effect from December 1999 through early May
2005, the Fund made regular monthly distributions
at an annualized rate equal to 11% of the Fund's
net asset value, as determined as of the last
trading day during the first week of that month
(usually a Friday, unless the NYSE is closed that
Friday). Effective with the June 2005 monthly
distribution, the Board reduced the annualized
rate for distributions from 11% to 9%. The Fund's
Board may change or terminate the managed
distribution policy at any time; any such change
or termination may have an adverse effect on the
market price for the Fund's shares.
To the extent that the Fund's taxable income in
any fiscal year exceeds the aggregate amount
distributed based on a fixed percentage of its net
asset value, the Fund would make an additional
distribution in the amount of that excess near the
end of the fiscal year. To the extent that the
aggregate amount distributed by the Fund (based on
a fixed percentage of its net asset value) exceeds
its current and accumulated earnings and profits,
the amount of that excess would constitute a
return of capital or net realized capital gains
for tax purposes.
The actual sources of the Fund's monthly
distributions may be net investment income, net
realized capital gains, return of capital or a
combination of the foregoing and may be subject to
retroactive recharacterization at the end of the
Fund's fiscal year based on tax regulations. The
actual amounts attributable to each of these
sources after recharacterization, if any, will be
reported to Shareholders in January of each year
on Form 1099-DIV.
Monthly distributions based on a fixed percentage
of the Fund's net asset value may require the Fund
to make multiple distributions of long-term
capital gains during a single fiscal year. The
Fund has received exemptive relief from the
Securities and Exchange Commission that enables it
to do so. The Fund's Board will reassess the
annualized percentage of net assets at which the
Fund's monthly distributions will be made no less
frequently than annually.
The first regular monthly distribution to be paid
on Shares acquired upon exercise of Rights will be
the first monthly distribution the record date for
which occurs after the issuance of
4
the Shares. The Shares issued in the Offer would
be entitled to the distribution that would be
declared to Shareholders in January 2006. See
"Dividends and Other Distributions; Dividend
Reinvestment Plan."
The Fund has established a Dividend Reinvestment
Plan ("Dividend Reinvestment Plan") under which
all Shareholders whose Fund Shares are registered
in their own names, or in the name of UBS
Financial Services Inc. or its nominee, have all
dividends and other distributions on their Shares
automatically reinvested in additional Shares of
the Fund, unless such Shareholders elect to
receive cash. Shareholders who hold their Shares
in the name of a broker or nominee other than UBS
Financial Services Inc. should contact such broker
or other nominee to determine whether, or how,
they may participate in the Dividend Reinvestment
Plan. The ability of such Shareholders to
participate in the Dividend Reinvestment Plan may
change if their Shares are transferred into the
name of another broker or nominee.
INVESTMENT OBJECTIVES AND POLICIES................ The Fund's primary objective is to achieve a high
level of current income. As a secondary objective,
the Fund seeks capital appreciation, to the extent
consistent with its primary objective.
The Fund is designed for investors willing to
assume additional risk in return for the potential
for high current income. The Fund is not intended
to be a complete investment program or to provide
a diversified multi-asset class strategy. There is
no assurance that the Fund will achieve its
investment objectives.
Under normal market conditions, the Fund invests
at least 65% of its total assets in debt
securities of issuers located in emerging market
countries. The Fund's investment in debt
securities consists of (i) debt securities issued
or guaranteed by governments, their agencies,
instrumentalities or political subdivisions
located in emerging market countries, or by
central banks located in emerging market countries
(collectively, "Sovereign Debt"); (ii) interests
in issuers organized and operated for the purpose
of securitizing or restructuring the investment
characteristics of Sovereign Debt; and (iii) debt
securities issued by banks and other business
entities located in emerging market countries or
issued by banks and other business entities not
located in emerging market countries but
denominated in or indexed to the currencies of
emerging market countries.
Under normal circumstances, the Fund invests at
least 80% of its net assets in US
dollar-denominated debt securities. The Fund may
also invest up to 20% of its net assets in non-US
dollar-denominated debt securities under normal
circumstances. These investments may be
denominated in the local currencies of emerging
market countries, as well as in reserve currencies
such as the British Pound Sterling. These non-US
dollar-denominated investments may include debt
securities (i) of issuers located in
5
emerging market countries or (ii) of issuers not
located in emerging market countries that are
denominated in or indexed to the currencies of
emerging market countries.
When UBS Global AM believes unusual circumstances
warrant a defensive posture, the Fund temporarily
may commit all or any portion of its assets to
cash (US dollars or foreign currencies) or money
market instruments of US or foreign issuers,
including repurchase agreements. Under normal
market conditions, the Fund may commit up to 20%
of its net assets to cash (US dollars) as well as
invest up to a total of 35% of its total assets in
a combination of cash (US dollars) and US
dollar-denominated money market instruments of US
issuers, including repurchase agreements, for
liquidity purposes (such as clearance of portfolio
transactions, the payment of dividends and
expenses and share repurchases) or as part of its
ordinary investment activities. The Fund's
investments in US dollar-denominated money market
instruments are considered to be investments in US
dollar-denominated debt securities for purposes of
the 80% minimum noted above.
Currently, the Fund's U.S. dollar-weighted average
duration is not expected to differ from the
weighted average duration of the Fund's benchmark,
the JP Morgan Emerging Markets Bond Index-Global
by more than one year. As of September 30, 2005,
the duration of the JP Morgan Emerging Markets
Bond Index-Global was 6.69 years and the duration
of Fund was 5.94 years.
Debt securities with longer durations tend to be
more sensitive to changes in interest rates,
usually making them more volatile than debt
securities with short durations.
The Fund's 80% policy is a "non-fundamental"
policy. This means that this investment policy may
be changed by the Fund's Board without Shareholder
approval. However, the Fund has also adopted a
policy to provide its Shareholders with at least
60 days' prior written notice of any change to
this 80% policy. Management of the Fund is
considering whether it would be beneficial to
change this policy to permit greater flexibility
for investment in non-US dollar denominated
securities; Shareholders would receive advance
notice of such a change. Such a change may or may
not occur in the future.
As used in this Prospectus, emerging market
countries generally include every country in the
world other than the United States, Canada, Japan,
Australia, New Zealand and most Western European
countries. A list of the primary emerging market
countries in which the Fund expects some or all of
its investments to be made primarily is set forth
on page 28. While the Fund generally is not
restricted in the portion of its assets which may
be invested in a single country or region, under
normal conditions, the Fund's assets are invested
in issuers located in at least three countries.
6
Debt securities held by the Fund may take the form
of bonds, notes, bills, debentures, convertible
securities, warrants (as defined herein), bank
debt obligations, short-term paper, loan
participations, assignments and interests issued
by entities organized and operated for the purpose
of restructuring the investment characteristics of
Sovereign Debt. Some Sovereign Debt instruments in
which the Fund invests are likely to be acquired
at a discount.
Zero coupon securities of governmental or private
issuers generally pay no cash interest to their
holders prior to maturity. Accordingly, although
the Fund will receive no payments on its zero
coupon securities prior to their maturity or
disposition, it will have income attributable to
such securities, and it will be required, in order
to maintain the desired tax treatment available to
regulated investment companies under the federal
income tax law, to include in its dividends the
income attributable to its zero coupon securities.
Such dividends will be paid from the cash assets
of the Fund, from borrowings or by liquidating
portfolio securities, if necessary, at a time that
the Fund otherwise might not have done so. The
risks associated with holding illiquid securities
that are not readily marketable may be accentuated
at such time.
See "Investment Objectives and Policies," "Other
Investment Practices," "Special Considerations and
Risk Factors," "Taxation" and "Additional
Information About Investment Policies; Investment
Limitations and Restrictions" in the SAI.
INVESTMENT ADVISOR................................ UBS Global AM is the Fund's investment advisor and
administrator ("Investment Advisor"). UBS Global
AM, a Delaware corporation, is located at 51 West
52nd Street, New York, New York, 10019-6114. UBS
Global AM is an investment advisor registered with
the US Securities and Exchange Commission. As of
September 30, 2005, UBS Global AM had
approximately $50.2 billion in assets under
management. UBS Global AM is an indirect wholly
owned subsidiary of UBS AG ("UBS") and a member of
the UBS Global Asset Management Division, which
had approximately $568.9 billion in assets under
management worldwide as of September 30, 2005. UBS
is an internationally diversified organization
headquartered in Zurich, Switzerland, with
operations in many areas of the financial services
industry.
As Investment Advisor, UBS Global AM receives from
the Fund a fee, accrued weekly and paid monthly,
in an amount equal to the following percentages of
its average weekly net assets: the annual rate of
1.25% on assets up to $200 million and 1.00% on
assets above $200 million. See "Management of the
Fund."
Because the advisory fee is based on the Fund's
assets, and since the Offer is expected to result
in an increase in the Fund's assets, UBS Global AM
will benefit from the Offer by an increase in the
dollar amount of the fee; Shareholders may also
benefit from the
7
offer because it may also marginally reduce the
total expense ratio, even for non-participating
shareholders.
SHARE REPURCHASES AND TENDER OFFERS; CONVERSION TO
OPEN-END FUND................................... In recognition of the possibility that the Shares
could trade at a discount from NAV and that any
such discount may not be in the best interest of
Shareholders, the Fund's Board, in consultation
with UBS Global AM, may also consider the
possibility of making open-market Share
repurchases or tender offers.
There can be no assurance that the Board will
decide to undertake either of these actions or
that, if undertaken, such actions will result in
the Shares trading at a price that is equal or
close to NAV per Share. The Board, in consultation
with UBS Global AM, also may consider from time to
time whether it would be in the best interests of
the Fund and its Shareholders to convert the Fund
to an open-end investment company, but there can
be no assurance that the Board will conclude that
such a conversion is in the Shareholders' best
interests. See "Description of Capital Stock."
SPECIAL CONSIDERATIONS AND RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE
"FORWARD-LOOKING STATEMENTS." ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF UNCERTAINTIES SET
FORTH BELOW AND ELSEWHERE IN THE PROSPECTUS. SEE "SPECIAL CONSIDERATIONS AND
RISK FACTORS" FOR A MORE COMPLETE DESCRIPTION OF RISKS THAT MAY BE ASSOCIATED
WITH AN INVESTMENT IN THE FUND.
DILUTION--NON-PARTICIPATION IN THE OFFER.......... Shareholders who do not fully exercise their
Rights will experience dilution of their
proportionate ownership interest in the Fund and
dilution of voting power.
POSSIBLE YIELD DILUTION........................... It is possible that the Offer could result in
dilution of the Fund's gross yield. Dilution of
the Fund's gross yield could occur if the proceeds
of the Offer are invested in securities that
provide a yield lower than the current portfolio
yield. Any reduction in gross yield may be taken
into account in further re-evaluations of the
distribution rate paid under the Fund's managed
distribution policy.
SHARE PRICE VOLATILITY............................ Volatility in the market price of Shares may
increase during the rights offering period. The
Offer may result in some Shareholders selling
their Shares, which would exert downward price
pressure on the price of Shares, while others
wishing to participate in the Offer may buy
Shares, having the opposite impact.
UNDER-SUBSCRIPTION................................ It is possible that the Offer will not be fully
subscribed. Under-subscription of the Offer could
have an impact on the ratios and the net proceeds
of the Offer.
GENERAL........................................... The Fund is designed for investors who are willing
to assume additional risk in return for the
potential for high income and,
8
secondarily, capital appreciation. An investment
in the Fund may be speculative in that it involves
a high degree of risk and is not intended to serve
as a complete investment program or provide a
diversified multi-asset class strategy. There is
no assurance that the Fund will achieve its
investment objectives. Investors should carefully
consider their ability to assume the risks of
owning shares of an investment company that
invests in lower-rated income securities before
making an investment in the Fund. Past performance
is no guarantee of future results.
RISKS ASSOCIATED WITH INVESTMENTS IN EMERGING
MARKET SECURITIES............................... Investments in emerging market securities involve
certain considerations not typically associated
with investing in securities of US companies,
including (i) currency devaluations and other
currency exchange rate fluctuations,
(ii) political uncertainty and instability,
including military coups, (iii) more substantial
government involvement in the economy,
(iv) higher rates of inflation, (v) less
government supervision and regulation of the
securities markets and participants in those
markets, (vi) controls on foreign investment and
limitations on repatriation of invested capital
and on the Fund's ability to exchange local
currencies for US dollars, and (vii) greater price
volatility, substantially less liquidity and
significantly smaller capitalization of securities
markets. Interest and dividend income on emerging
market securities may be subject to withholding
and other taxes, which would reduce the yield on
such securities to the Fund and which may not be
recoverable by the Fund or its stockholders. In
addition, because the Fund may invest up to 20% of
its net assets in non-US dollar-denominated
securities, changes in foreign currency exchange
rates will affect the Fund's net asset value, the
value of interest and dividends earned and gains
and losses realized on the sale of securities
denominated in foreign currencies. The operating
expense ratio of the Fund can be expected to be
higher than that of an investment company
investing in US securities because certain
expenses of investing in emerging market
securities, such as custodial costs, are higher.
Only a limited market, if any, currently exists
for hedging instruments relating to securities or
currencies in most emerging market countries.
Accordingly, the Fund may not be able to
effectively hedge its currency exposure or
investment in such markets.
RISKS ASSOCIATED WITH INVESTMENTS IN SOVEREIGN
DEBT............................................ Investments in Sovereign Debt involve special
risks. Foreign governmental issuers of debt or the
governmental authorities that control the
repayment of the debt may be unable or unwilling
to repay principal or pay interest when due. In
the event of default, there may be limited or no
legal recourse in that, generally, remedies for
defaults must be pursued in the courts of the
defaulting party. Political conditions, especially
a sovereign entity's willingness to meet the terms
of its debt obligations, are of considerable
significance. Also, there can be no assurance that
the
9
holders of commercial bank loans to the same
sovereign entity may not contest payments to the
holders of Sovereign Debt in the event of default
under commercial bank loan agreements. In
addition, there is no bankruptcy proceeding with
respect to Sovereign Debt on which a sovereign has
defaulted, and the Fund may be unable to collect
all or any part of its investment in a particular
issue. A sovereign debtor's willingness or ability
to repay principal or pay interest in a timely
manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign
exchange on the date a payment is due, the
relative size of the debt service burden to the
economy as a whole, the sovereign debtor's policy
toward principal international lenders and the
political constraints to which a sovereign debtor
may be subject. Political changes or a
deterioration of a country's domestic economy or
balance of trade may also affect the willingness
of countries to service their Sovereign Debt.
Foreign investment in certain Sovereign Debt is
restricted or controlled to varying degrees,
including requiring governmental approval for the
repatriation of income, capital or proceeds of
sales by foreign investors. These restrictions or
controls may at times limit or preclude foreign
investment in certain Sovereign Debt and increase
the costs and expenses of the Fund. A substantial
portion of the Sovereign Debt in which the Fund
may invest may be issued as part of debt
restructurings, and such debt is to be considered
speculative. There is a history of defaults with
respect to commercial bank loans by public and
private entities issuing such debt. All or a
portion of the interest payments and/or repayment
of principal with respect to such debt may be
uncollateralized.
RISKS ASSOCIATED WITH INVESTMENTS IN DEBT
SECURITIES...................................... The value of the debt securities held by the Fund,
and thus the net asset value per share of the
Shares, generally will fluctuate with (i) changes
in the perceived creditworthiness of the issuers
of those securities, (ii) movements in interest
rates, and (iii) changes in the relative values
of the currencies in which the Fund's investments
are denominated with respect to the US dollar. The
extent of the fluctuation of the Fund's net asset
value will depend on various other factors, such
as the average maturity of the Fund's investments,
the extent to which the Fund engages in borrowing
and other leveraging transactions, the extent to
which the Fund holds instruments denominated in
foreign currencies and the extent to which the
Fund hedges its interest rate, credit and currency
exchange rate risks. Many of the debt obligations
in which the Fund invests will have long
maturities. A longer average maturity generally is
associated with a higher level of volatility in
the market value of such securities in response to
changes in market conditions.
In addition, securities issued at a deep discount
are subject to greater fluctuations of market
value in response to changes in
10
interest rates than debt obligations of comparable
maturities that were not issued at a deep
discount.
RISKS ASSOCIATED WITH LOWER RATED SECURITIES...... A substantial portion of the Fund's assets may be
invested in debt securities, including Sovereign
Debt, that are rated below investment grade as
determined by internationally recognized
securities rating organizations, such as Moody's
Investors Service, Inc. ("Moody's") or Standard &
Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), or securities that are
unrated but deemed by UBS Global AM to be of
comparable quality. Debt securities rated BBB by
S&P or Baa by Moody's, and comparable unrated
securities, are considered to be investment grade,
although such securities have speculative
characteristics. Debt securities related below
investment grade are sometimes referred to as
"high yield" or "junk" bonds and are considered
more speculative with respect to the issuer's
ability to pay interest and repay principal.
Changes in economic conditions or other
circumstances are more likely, in S&P's and
Moody's view, to lead to a weakened capacity for
the issuers of such securities to make interest
and principal payments than is the case for higher
grade debt securities. Debt securities rated below
investment grade are deemed by S&P and Moody's to
be predominantly speculative with respect to the
issuer's capacity to pay interest and repay
principal and to involve major risk exposures to
adverse conditions. The lower grade securities in
which the Fund may invest may include securities
having the lowest ratings assigned by S&P or
Moody's and, together with comparable unrated
securities, may include securities in default or
that face the risk of default with respect to the
payment of principal or interest. These securities
are considered to have extremely poor prospects of
ever attaining any real investment standing. Lower
grade debt securities generally offer a higher
yield than that available from higher grade issues
with similar maturities. However, lower grade debt
securities involve higher risks, in that they are
especially subject to adverse changes in general
economic conditions and in the industries in which
the issuers are engaged, to changes in the
financial condition of the issuers and to price
fluctuation in response to changes in interest
rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers
may experience financial stress, which could
adversely affect their ability to make payments of
principal and interest on, and increase the
possibility of default of, such debt securities.
The market for lower grade debt securities
generally is thinner and less active than that for
higher quality securities.
As a result, the Fund could find it more difficult
to sell such securities when UBS Global AM
believes it advisable to do so or may be able to
sell such securities only at prices lower than if
such securities were more widely traded. Although
UBS Global AM attempts to minimize the speculative
risks associated with
11
investments in such securities through credit
analysis, attention to current trends in interest
rates and other factors and investments in a
variety of securities, investors should carefully
review the investment objectives and policies of
the Fund and consider their ability to assume the
investment risks involved before making an
investment.
ILLIQUID SECURITIES............................... The Fund may invest without limitation in illiquid
securities. The Fund may not be able readily to
dispose of such securities at prices that
approximate those at which the Fund could sell
such securities if they were more widely traded,
and as a result of such illiquidity, the Fund may
have to sell other investments or engage in
borrowing transactions if necessary to raise cash
to meet its obligations. See "Other Investment
Practices--Illiquid Securities."
MARKET PRICE AND NET ASSET VALUE OF SHARES........ Although the Shares have traded at a premium to
their NAV for 102 out of 105 weeks since
November 7, 2003, shares of closed-end management
investment companies frequently trade at a
discount from their NAVs. Whether an investor will
realize gains or losses upon the sale of Shares
does not depend directly upon changes in the
Fund's NAV, but rather upon whether the market
price of the Shares at the time of sale is above
or below the investor's purchase price for the
Shares. This market risk is separate and distinct
from the risk that the Fund's NAV may decrease.
Accordingly, the Shares are designed primarily for
long-term investors. Investors in Shares should
not view the Fund as a vehicle for trading
purposes. See "Special Considerations and Risk
Factors--Market Price and Net Asset Value of
Shares" and "Capital Stock."
The net asset value of the Fund's Shares will
fluctuate with interest rate changes, as well as
with price changes of the Fund's portfolio
securities.
ANTI-TAKEOVER PROVISIONS.......................... The Fund's Articles of Incorporation contain
provisions limiting (1) the ability of other
entities or persons to acquire control of the
Fund, (2) the Fund's freedom to engage in certain
transactions and (3) the ability of the Fund's
directors or Shareholders to amend the Articles of
Incorporation. These provisions of the Articles of
Incorporation may be regarded as "anti-takeover"
provisions. These provisions could have the effect
of depriving the Shareholders of opportunities to
sell their Shares at a premium over prevailing
market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender
offer or similar transaction. The overall effect
of these provisions is to render more difficult
the accomplishment of a merger or the assumption
of control by a Shareholder who owns beneficially
more than 5% of the Shares. They provide, however,
the advantage of potentially requiring persons
seeking control of the Fund to negotiate with its
management regarding the price to be paid and
facilitating the continuity of the Fund's
management, investment objectives and policies.
12
See "Special Considerations and Risk
Factors--Anti-Takeover Provisions," and "Capital
Stock--Certain Anti-Takeover Provisions of the
Articles of Incorporation."
MARKET DISRUPTION................................. As a result of terrorist attacks on the World
Trade Center and the Pentagon on September 11,
2001, some of the US securities markets were
closed for a four-day period. These terrorist
attacks and related events led to increased
short-term market volatility. US military and
related action in Iraq and Afghanistan and events
in the Middle East could have significant adverse
effects on US and world economies and markets. A
similar disruption of the US or world financial
markets could impact interest rates, secondary
trading, ratings, credit risk, inflation and other
factors relating to the Shares. See "Special
Considerations and Risk Factors--Market
Disruption."
13
FUND EXPENSES
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering
price)....................................... None
Dividend Reinvestment Plan Fees............... None
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS ATTRIBUTABLE TO SHARES)
Investment Advisory and Administration Fees... 1.12%
Other Expenses(1)............................. 0.13%
----
Total Annual Expenses(2)...................... 1.25%
----
-------------------
(1) Other expenses have been estimated for the current fiscal year.
(2) The 1.25% expense ratio assumes that the offer is fully subscribed,
yielding estimated net proceeds of $108,651,641 (assuming a Subscription
Price of $16.75 per Share) and that, as a result, based on the Fund's net
assets attributable to Shareholders on November 10, 2005 of $307,876,642,
the net assets attributable to Shareholders would be $416,528,283. If the
subscription rate of the Offer is less than 50%, "Other Expenses" would be
0.15% (a difference of 2 basis points). Accordingly, "Total Annual
Expenses" would be 1.27% (a difference of 2 basis points).
The above table is intended to assist the Fund's investors in understanding
the various costs and expenses associated with investing in the Fund through the
exercise of Rights.
EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return, (ii)
reinvestment of all dividends and other distributions at NAV, and (iii) the
percentage amounts listed under Annual Expenses above remain the same in the
years shown:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$13 $40 $69 $151
The above tables and the assumption in this example of a 5% annual return
and reinvestment at NAV are required by regulations of the SEC applicable to all
closed-end investment companies. The assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
the Fund's Shares. In addition, while this Example assumes reinvestment of all
dividends and other distributions at net asset value, participants in the Fund's
Dividend Reinvestment Plan will receive Shares at the market price in effect at
that time if that price is lower than net asset value.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
14
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand
the Fund's financial performance. Certain information reflects financial results
from a single Fund share. In the table, "total investment return" represents the
rate that an investor would have earned on an investment in the Fund. The
information in the financial highlights for the five years ended October 31,
2004 has been audited by Ernst & Young LLP, independent registered public
accounting firm, whose report appears in the Fund's Annual Report to
Shareholders. The Fund's financial statements are included in the Fund's Annual
and Semi-Annual Reports. The Annual and Semi-Annual Reports may be obtained
without charge by calling 1-800-647 1568.
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED OCTOBER 31
APRIL 30, 2005 ------------------------------------------------------
(UNAUDITED) 2004 2003 2002+ 2001 2000
-------------- -------- -------- -------- -------- --------
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 16.43 $ 15.92 $ 14.14 $ 14.16 $ 14.42 $ 13.66
-------- -------- -------- -------- -------- --------
Net investment income.... 0.45 0.98 1.02 1.04 1.24 1.48
Net realized and
unrealized gains from
investment and foreign
currency
transactions........... 0.43 1.27 2.44 0.52 0.10 0.71
-------- -------- -------- -------- -------- --------
Net increase from
investment
operations............. 0.88 2.25 3.46 1.56 1.34 2.19
-------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.87)(2) (0.97) (1.13) (1.31) (1.15) (1.48)
-------- -------- -------- -------- -------- --------
Distributions from net
realized gains from
investment
transactions........... (1.29) (0.77) (0.53) -- -- --
-------- -------- -------- -------- -------- --------
Distributions from
paid-in-capital........ -- -- (0.02) (0.27) (0.46) --
-------- -------- -------- -------- -------- --------
Distributions in excess
of net investment
income................. -- -- -- -- -- (0.09)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to
Shareholders........... (2.16) (1.74) (1.68) (1.58) (1.61) (1.57)
-------- -------- -------- -------- -------- --------
Net increase in net asset
value resulting from
repurchase of common
stock.................. -- -- -- -- 0.01 0.14
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD................. $ 15.15 $ 16.43 $ 15.92 $ 14.14 $ 14.16 $ 14.42
======== ======== ======== ======== ======== ========
MARKET VALUE END OF
PERIOD................. $ 17.31 $ 18.31 $ 17.07 $ 13.87 $ 12.98 $ 12.63
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN(1).............. 5.52% 18.68% 36.52% 19.38% 15.80% 24.55%
======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period(000's).......... $294,530 $319,359 $309,516 $274,968 $275,205 $281,955
Expenses to average net
assets................. 1.43%* 1.40% 1.43% 1.43% 1.41% 1.39%
Net investment income to
average net assets..... 5.78%* 6.18% 6.66% 7.23% 8.46% 10.12%
Portfolio turnover
rate................... 86% 140% 53% 57% 51% 43%
------------------------
* Annualized.
(1) Total investment return is calculated assuming a $10,000 purchase of common
stock at the current market price on the first day of each period reported
and a sale at the current market price on the last day of each period
reported, and assuming reinvestment of dividends and other distributions at
prices obtained under the Fund's Dividend Reinvestment Plan. Total
investment return does not reflect brokerage commissions and has not been
annualized for the period less than one year. Returns do not reflect the
deduction of taxes that a shareholder would pay on Fund
dividends/distributions or a sale of Fund shares.
(2) The actual sources of the Fund's fiscal year 2005 dividends/distributions
may be net investment income, net realized capital gains, return of capital
or a combination of the foregoing and may be subject to retroactive
recharacterization at the end of the Fund's fiscal year based on tax
regulations. Shareholders will be informed of the tax characteristics of
dividends/ distributions after the close of the 2005 fiscal year.
+ As required, effective as of November 1, 2001, the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide, Audits of Investment
Companies, and began amortizing premium on debt securities for financial
statement reporting purposes only. The effect of this change for the year
ended October 31, 2002 was to decrease net investment income per share by
$0.02, increase net realized and unrealized gains from investment
activities per share by $0.02, and decrease the ratio of net investment
income to average net assets from 7.35% to 7.23%. Per share ratios and
supplemental data for years prior to November 1, 2001 have not been
restated to reflect this change in presentation.
15
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to its Shareholders non-transferable Rights to subscribe
for an aggregate of 6,509,889 Shares. The Fund may increase the number of Shares
subject to subscription by up to 25% of the Shares, for an aggregate total of
8,137,361 Shares. Shareholders will receive one Right for each Share held as of
the Record Date, rounded up to the nearest number of Rights evenly divisible by
three. The Rights entitle a Shareholder to acquire, at the Subscription Price,
one Share for each three Rights held. If you exercise all of the Rights issued
to you, you also may subscribe for Shares which were not otherwise subscribed
for by others in the Primary Subscription pursuant to the Over-Subscription
Privilege.
SAMPLE CALCULATION
PRIMARY SUBSCRIPTION ENTITLEMENT (1-FOR-3)
-------------------------------------------------------------------------------
NUMBER OF SHARES OWNED ON THE RECORD DATE = 100
----------
NUMBER OF RIGHTS ISSUED* 102 DIVIDED BY 3 = 34 NEW SHARES
---------- ----------
* AUTOMATICALLY ROUNDED UP TO THE NEAREST NUMBER OF RIGHTS EVENLY DIVISIBLE BY
THREE.
Rights may be exercised at any time during the Subscription Period, which
commences on November 10, 2005 and ends at 5:00 p.m., Eastern time, on
December 20, 2005, unless extended by the Fund (such date, as it may be
extended, is referred to in this Prospectus as the "Expiration Date").
Fractional Shares will not be issued upon the exercise of Rights. In the
case of Shares held of record by a broker-dealer, bank or other financial
intermediary (each, a "Nominee"), the number or Rights issued to such Nominee
will be adjusted to permit rounding up (to the nearest number of Rights evenly
divisible by three) of the Rights to be received by each of the beneficial
owners for whom it is the holder of record only if the Nominee provides to the
Fund, on or before the close of business on December 16, 2005, a written
representation of the number of Rights required for such rounding. Rounding will
be applied on an account by account basis, therefore no aggregation of accounts
will occur.
The Rights are non-transferable. Therefore, only the underlying Shares will
be listed for trading on the NYSE or any other exchange. For purposes of
determining the number of Shares a Shareholder may acquire pursuant to the
Offer, broker-dealers whose Shares are held of record by Cede & Co. ("Cede"),
nominee for the Depository Trust Company, 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. Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, which is more fully
discussed under "Over-Subscription Privilege."
The Subscription Price will be the greater of the (i) NAV per share on
December 20, 2005 ("the Expiration Date") or (ii) 95% of the volume weighted
average share price on the New York Stock Exchange on the Expiration Date and
the four preceding business days. Since the Expiration Date will be
December 20, 2005 (unless the Fund extends the subscription period),
Shareholders who choose to exercise their Rights will not know the Subscription
Price at the time they exercise their Rights.
The Rights will be evidenced by Exercise Forms which will be mailed to
Shareholders. You may exercise your Rights by completing an Exercise Form and
delivering it, together with payment by means of (i) a check or money order or
(ii) a Notice of Guaranteed Delivery to the Subscription Agent during the
Subscription Period. The methods by which Rights may be Exercised and Shares
paid for are set forth below in "Exercise of Rights" and "Payment for Shares."
16
PURPOSE OF THE OFFER
The Offer seeks to provide existing Shareholders with an opportunity to
purchase additional Shares at a price below market value, while permitting the
Fund to take advantage of additional investment opportunities and/or reposition
the Fund's portfolio in a more efficient manner. For example, as provided below
under "Increased Portfolio Management Efficiency," the additional capital
resulting from the rights offering would permit the Fund to purchase newly
issued securities and/or provide the ability to increase current holdings
without the need to raise capital by selling certain other existing positions
and thus possibly paying transaction costs to sell those securities. If the Fund
continues to trade at a premium, it will provide the potential for an accretive
rights offering, which means that the Offer could increase NAV per Share for
existing Shareholders due to the fact that the Subscription Price will likely
exceed the NAV per Share on the Expiration Date.
The Board has been advised by UBS Global AM that it believes Shareholders
will benefit from the Offer. The Board was informed by UBS Global AM that
investment opportunities are available, and that Shareholders could realize
benefits from increased investment in such securities. However, there can be no
assurance that the anticipated benefits discussed herein will occur as a result
of the Offer or the investment of the Offer's proceeds. In addition, UBS Global
AM, in recommending the Offer, disclosed to the Board its potential conflict of
interest due to the fact that the increased investment in the Fund would
increase the Fund's assets and thereby would result in the receipt of increased
advisory fees.
UBS Global AM informed the Board that it considered alternatives to the
Offer such as a secondary offering or the employment of leverage. Due to the
lack of historical precedence with regard to a secondary offering and the
increased volatility relating to the use of leverage, UBS Global AM informed the
Board that, in its view, these options were less desirable than the Offer.
In determining that the initiation of the Offer and the proposed terms of
the Offer were in the best interest of Shareholders, the Board considered a
variety of factors, including those set forth below. In its considerations, the
Board was presented with information relevant to these factors by UBS Global AM.
The Board was also provided with materials by UBS Global AM on the current
investing environment and outlook for the Fund. UBS Global AM informed the Board
that it believed that the potential benefits of conducting the Offer mitigated
the potential risks associated with the Offer, as described herein. The Board
considered all of the materials presented to it by UBS Global AM, including the
terms proposed by UBS Global AM, in recommending the Offer. The Board also
established a Rights Offering Committee as a special committee of the Board to
review the proposed terms of the Offer. The Rights Offering Committee met as it
deemed necessary with management to review and discuss the proposed terms.
OPPORTUNITY TO PURCHASE BELOW MARKET PRICE. The Offer affords existing
Shareholders the opportunity to purchase additional Shares at a price that will
be below market value at the Expiration Date. However, Shareholders who do not
fully exercise their Rights will own, upon completion of the Offer, a smaller
proportional interest in the Fund than they owned before the Offer. The Board
took this into account in adopting the Subscription Price formula applicable to
the Offer and selecting the ratio of Rights offered relative to the number of
Shares held on the Record Date. See "Special Considerations and Risk Factors."
POTENTIAL INCREASE IN NAV. If the Fund continues to trade at a premium, the
Offer could increase the NAV of the Fund due to the fact that the discounted
Subscription Price would likely exceed the NAV.
INCREASED PORTFOLIO MANAGEMENT EFFICIENCY. In order to take advantage of new
investment opportunities without the Offer, the Fund likely would be required to
sell a portion of its existing investments at a time when generally country
fundamentals are continuing to strengthen. The Offer provides the
17
Fund with the ability to capitalize on new investment opportunities, allowing it
to increase the total number of its holdings while maintaining its investment in
existing assets.
While UBS Global AM believes that the market is conducive for investing in
debt securities of issuers located in emerging market countries, it has
significant assets within "multi-asset portfolios," that are driven by both
top-down and bottom-up portfolio construction considerations. Such portfolios
look at various assets classes, including Emerging Market Debt, in the context
of a more relative valuation perspective. Allocation decisions by multi-asset
portfolios managed by UBS Global AM may or may not be consistent with the views
of the underlying asset class teams and single strategy funds that they manage.
MARGINAL REDUCTION IN EXPENSE RATIO. The Board was advised by UBS Global AM
that the Fund could achieve additional economies of scale as a result of an
increase in the Fund's total assets which would also benefit Shareholders who
did not fully exercise their Rights. UBS Global AM believes that the increase in
assets from the Offer may marginally reduce the Fund's expenses as a percentage
of average net assets per Share over time because fixed costs would be spread
over a greater number of Shares. Given the Fund's current size, the Fund's
investment advisory and administrative fee is currently subject to a breakpoint
discount. As a result, any additional shares purchased would benefit from this
breakpoint discount and the proceeds from the Offer would further reduce the
Fund's total annual expenses. However, the savings from such reduction is
expected to be marginal and may be offset by the expenses of the Offer at first.
The Board also considered the proposed terms of the Offer. The Board's
decisions regarding the terms of the Offer included deliberations on, among
other things, the benefits and drawbacks of conducting a non-transferable versus
a transferable rights offering, the pricing structure of the Offer, the
anticipated impact of the Offer on market price, the expenses of the Offer and
the potential risks associated with the terms of the Offer. UBS Global AM and
the Board determined that the overall potential benefits of the terms mitigated
the associated risks.
Therefore, the Board has determined that it is in the best interests of the
Fund to increase the assets of the Fund available for investment through the
Offer, so that the Fund will be in a better position to more fully take
advantage of available investment opportunities in a market environment believed
by UBS Global AM to be conducive for investing and to reposition the portfolio
in a more efficient manner.
UBS Global AM may also benefit from the Offer because its advisory fee is
based on the assets of the Fund. See "Management of the Fund--Investment
Advisor." It is not possible to state precisely the amount of additional
compensation UBS Global AM might 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, if the Offer is fully subscribed, it would add (net of
offering expenses) approximate1y $108,650,000 to the net assets of the Fund.
This amount, assuming no fluctuation due to changes in the market, would add
$1,358,100 to UBS Global AM's annual compensation based upon an advisory fee of
1.25% on assets up to $200 million and 1.00% on assets above $200 million. The
Fund's assets could increase further if the Shares subject to the
Over-Subscription Privilege considered by the Board were to be issued.
The Board considered the possibility of a decline in the market price of
Shares of the Fund. The Board was advised by UBS Global AM that if market
conditions were to become less favorable, UBS Global AM may desire to reevaluate
the Offer. UBS Global AM indicated to the Board that, should the Fund begin to
trade at a significant discount to NAV, it would re-examine the Offer and may
consider recommending cancellation of the Offer or a change in the terms of the
Offer.
The Fund will suspend the Offer until it amends this Prospectus if, after
the effective date of this Prospectus, the Fund's NAV declines more than 10%
from its NAV as of that date or the NAV
18
increases to an amount greater than the net proceeds. In such event, the Fund
will notify Shareholders and permit Exercising Shareholders to cancel exercise
of their Rights. Shareholders will have their payment for additional Shares
returned to them if they opt to cancel the exercise of their Rights.
The Fund may, in the future and if approved by the Board, choose to make
additional rights offerings for a number of Shares and on terms that may or may
not be similar to this Offer. Any such future rights offering will be made in
accordance with the then applicable requirements of the 1940 Act and the
Securities Act of 1933, as amended ("Securities Act"). The Fund does not intend
to conduct rights offerings on a routine basis.
There can be no assurance that the Fund or its Shareholders will achieve any
of the foregoing objectives or benefits through the Offer.
OVER-SUBSCRIPTION PRIVILEGE
If some Shareholders do not exercise all of the Rights initially issued to
them in the Primary Subscription, those Shares which have not been subscribed
for will be offered, by means of the Over-Subscription Privilege, to
Shareholders who have exercised all the Rights initially issued to them and who
wish to acquire more than the number of Shares for which the Rights issued to
them are exercisable. Shareholders who exercise all the Rights initially issued
to them will be asked to indicate, on the Exercise Form which they submit with
respect to the exercise of the Rights, how many Shares they are willing to
acquire pursuant to the Over-Subscription Privilege. The Fund may, at its
discretion, issue up to an additional 25% of the Shares in the Offer to honor
over-subscription requests if sufficient Shares are not available from the
Primary Subscription to honor all over-subscriptions. If sufficient Shares
remain, all over-subscriptions will be honored in full. If sufficient Shares are
not available to honor all over-subscriptions, the available Shares will be
allocated among those who over-subscribe based on the number of Rights
originally issued to them by the Fund, so that the number of Shares issued to
Shareholders who subscribe pursuant to the Over-Subscription Privilege will
generally be in proportion to the number of Shares owned by them in the Fund on
the Record Date. The allocation process may involve a series of allocations to
assure that the total number of Shares available for over-subscriptions is
distributed on a pro-rata basis. The Over-Subscription Privilege may result in
additional dilution of a Shareholder's ownership percentage and voting rights.
The method by which Shares will be distributed and allocated pursuant to the
Over-Subscription Privilege is as follows. Shares will be available for purchase
pursuant to the Over-Subscription Privilege to the extent that the maximum
number of shares is not subscribed for through the exercise of the Primary
Subscription by the Expiration Date. In addition, the Fund may issue up to an
additional 25% of Shares to honor over-subscription requests. If these Shares
("Excess Shares") are not sufficient to satisfy all subscriptions pursuant to
the Over-Subscription Privilege, the Excess Shares will be allocated pro rata
(subject to the elimination of fractional shares) among those holders of Rights
exercising the Over-Subscription Privilege, in proportion, not to the number of
shares requested pursuant to the Over-Subscription Privilege, but to the number
of shares held on the Record Date; provided, however, that if this pro rata
allocation results in any Shareholder being allocated a greater number of Excess
Shares than the Shareholder subscribed for pursuant to the exercise of such
Shareholder's Over-Subscription Privilege, then such Shareholder will be
allocated only such number of Excess Shares as such Shareholder subscribed for
and the remaining Excess Shares will be allocated among all other Shareholders
exercising Over-Subscription Privileges. The formula to be used in allocating
Excess Shares is as follows:
Shareholder's Record Date Position X Excess Shares Remaining
----------------------------------------
Total Record Date Position by
All Over-Subscribers
19
THE SUBSCRIPTION PRICE
The Subscription Price per Share will be the greater of the (i) NAV per
share on the Expiration Date or (ii) 95% of the volume weighted average share
price on the New York Stock Exchange on the Expiration Date and the four
preceding business days.
The Fund announced the Offer after the close of trading on the NYSE on
August 17, 2005. The NAV at the close of business on August 17, 2005 and
November 10, 2005 was $15.73 and $15.84, respectively, and the last reported
sale price of a Share on the NYSE on those dates was $17.55 and $16.42,
respectively. Since the Offer expires before the actual Subscription Price is
determined, Shareholders who decide to acquire Shares on the Primary
Subscription or pursuant to the Over-Subscription Privilege will not know the
purchase price of such Share when they make such decision. Information about the
Fund's NAV may be obtained by calling 800-780 7438.
EXPIRATION OF THE OFFER
Rights will expire at 5:00 p.m., Eastern time, on the Expiration Date and
thereafter may not be exercised, unless the Offer is extended.
Any extension, termination, or amendment will be followed as promptly as
practical by announcement thereof, such announcement in the case of an extension
to be issued no later than 9:00 a.m., Eastern time, on the next business day
following the previously scheduled Expiration Date. The Fund will not, unless
otherwise obligated by law, have any obligation to publish, advertise, or
otherwise communicate any such announcement other than by making a release to
the Business Wire or such other means of announcement as the Fund deems
appropriate.
SUBSCRIPTION AGENT
The Subscription Agent is Colbent Corporation, 161 Bay State Drive,
Braintree, Massachusetts 02184, which will receive, for its administrative,
processing, invoicing and other services as Subscription Agent, a fee estimated
to be $35,000, which includes reimbursement for all out-of-pocket expenses
related to the Offer. Shareholder questions or inquiries should be directed to
Colbent Corporation, P.O. Box 859208, Braintree, Massachusetts 02185-9208.
SIGNED EXERCISE FORMS SHOULD BE SENT TO COLBENT CORPORATION, by one of the
methods described below:
SUBSCRIPTION CERTIFICATE DELIVERY METHOD ADDRESS
---------------------------------------- --------------------------------------------------
By First-Class Mail Colbent Corporation
P.O. Box 8592
Braintree, MA 02185-9208
By Overnight Courier, Express Mail or By Hand Colbent Corporation
161 Bay State Drive
Braintree, MA 02184
By Broker-Dealer or other Nominee Shareholders whose Shares are held in a brokerage,
(Notice of Guaranteed Delivery) bank or trust account may contact their broker or
other nominee and instruct them to submit a Notice
of Guaranteed Delivery and Payment on their
behalf.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY.
20
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
The Altman Group, Inc.
1275 Valley Brook Avenue
Lyndhurst, New Jersey 07071
Toll Free: 800-780 7438
You may also contact your bank, broker or other nominee for information with
respect to the Offer.
The Information Agent will receive a fee estimated to be approximately
$31,000, which includes reimbursement for all out-of-pocket expenses related to
its services as Information Agent.
EXERCISE OF RIGHTS
Rights may be exercised by completing and signing the reverse side of the
Exercise Form which accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Exercise Form to the
Subscription Agent, together with payment for the Shares as described below
under "Payment for Shares." Completed Exercise Forms and related payments must
be received by the Subscription Agent before 5:00 p.m., Eastern time, on or
before the Expiration Date (unless payment is effected by means of a Notice of
Guaranteed Delivery as described below under "Payment for Shares") at the
offices of the Subscription Agent at the address set forth above. A Shareholder
who exercises Rights pursuant to the Primary Subscription is hereinafter
referred to as an "Exercising Shareholder." Rights may also be exercised through
an Exercising Shareholder's broker, who may charge such Exercising Shareholder a
servicing fee.
Shareholders for whom there is not a current address ("stop mail" accounts)
will not be mailed this Prospectus or other subscription materials. Shareholders
whose record addresses on the Record Date are outside of the United States will
not be mailed Exercise Forms. See "Restriction on Foreign Shareholders."
EXERCISING SHAREHOLDERS WHO ARE RECORD OWNERS. Exercising Shareholders may
choose between either option set forth under "Payment for Shares" below. If time
is of the essence, option (2) will permit delivery of the Exercise Form and
payment after the Expiration Date.
INVESTORS WHOSE SHARES ARE HELD BY A BROKER-DEALER OR OTHER
NOMINEE. Exercising Shareholders whose Shares are held by a nominee such as a
broker-dealer, bank or trust company must contact the nominee to exercise their
Rights. In that case, the nominee will complete the Exercise Form on behalf of
the Exercising Shareholder and arrange for proper payment by one of the methods
set forth under "Payment for Shares" below.
NOMINEES. Nominees who hold Shares for the account of others should notify
the respective beneficial owners of such Shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
exercising the Rights. If the beneficial owner so instructs, the nominee should
complete the Exercise Form and submit it to the Subscription Agent with the
proper payment described under "Payment for Shares" below.
All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
Exercise Forms and the Subscription Price will be
21
determined by the Fund, which determinations will be final and binding. No
alternative, conditional or contingent subscriptions will be accepted. The Fund
reserves the absolute right to reject any or all subscriptions not properly
submitted or the acceptance of which would, in the opinion of the Fund's
counsel, be unlawful. The Fund also reserves the right to waive any
irregularities or conditions, and the Fund's interpretations of the terms and
conditions of the Offer shall be final and binding. Any irregularities in
connection with subscriptions must be cured within such time as the Fund shall
determine unless waived. Neither the Fund nor the Subscription Agent shall be
under any duty to give notification of defects in such subscriptions or incur
any liability for failure to give such notification. Subscriptions will not be
deemed to have been made until such irregularities have been cured or waived.
PAYMENT FOR SHARES
You may exercise your Rights and pay for Shares subscribed for pursuant to
the Primary Subscription and Over-Subscription Privilege in one of the following
ways:
(1) DELIVER EXERCISE FORM AND PAYMENT TO THE SUBSCRIPTION AGENT BY THE
EXPIRATION DATE:
Exercising Shareholders may deliver to the Subscription Agent at any of the
offices set forth above under "Subscription Agent" (i) a completed and executed
Exercise Form indicating the number of Rights they have been issued and the
number of Shares they are acquiring pursuant to the Primary Subscription, as
well as the number of any additional Shares they would like to subscribe for
under the Over-Subscription Privilege and (ii) payment for all such ordered
Shares based on the Estimated Subscription Price of $16.75 per Share, both no
later than 5:00 p.m., Eastern time, on the Expiration Date.
The Subscription Agent will deposit all checks received by it for the
purchase of Shares into a segregated interest bearing account of the Fund (the
interest from which will belong to the Fund) pending proration and distribution
of Shares.
A PAYMENT PURSUANT TO THIS METHOD (1) MUST BE IN US DOLLARS BY MONEY ORDER
OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, (2) MUST BE PAYABLE TO
"GLOBAL HIGH INCOME DOLLAR FUND INC." AND (3) MUST ACCOMPANY AN EXECUTED
EXERCISE FORM FOR SUCH SUBSCRIPTION TO BE ACCEPTED. THIRD (OR MULTIPLE) PARTY
CHECKS WILL NOT BE ACCEPTED.
(2) CONTACT YOUR BROKER, BANK OR TRUST COMPANY TO DELIVER NOTICE OF GUARANTEED
DELIVERY TO THE SUBSCRIPTION AGENT BY THE EXPIRATION DATE:
Exercising Shareholders may request a NYSE or National Association of
Securities Dealers, Inc. member, bank or trust company (each a "nominee") to
execute a Notice of Guaranteed Delivery (or equivalent electronic information)
and deliver it, by facsimile or otherwise, to the Subscription Agent by 5:00
p.m., Eastern time, on the Expiration Date indicating (i) the number of Rights
they wish to exercise, the number of Primary Subscription Shares they wish to
acquire, and the number of Over-Subscription Privilege Shares for which they
wish to subscribe and (ii) guaranteeing delivery of payment and a completed
Exercise Form from such Exercising Shareholder by December 23, 2005. The
Subscription Agent will not honor a Notice of Guaranteed Delivery unless the
completed Exercise Form is received by the Subscription Agent by the close of
Business on December 23, 2005 and full payment for the Shares is received by it
by the close of business on December 23, 2005.
On December 27, 2005 (the "Confirmation Date"), the Subscription Agent will
send a confirmation to each Exercising Shareholder (or, if the Shares are held
by a depository or other nominee, to such depository or other nominee), showing
(i) the number of Shares acquired pursuant to the Primary Subscription,
(ii) the number of Shares, if any, acquired pursuant to the Over-Subscription
Privilege,
22
(iii) the per Share and total purchase price for the Shares, and (iv) any
additional amount payable by such Exercising Shareholder to the Fund or any
excess to be refunded by the Fund to such Exercising Shareholder in each case
based upon the final Subscription Price. Any additional payment required from an
Exercising Shareholder must be received by the Subscription Agent by
December 30, 2005 (the "Final Payment Date"). Any excess payment to be refunded
by the Fund to an Exercising Shareholder will be mailed by the Subscription
Agent to the holder as promptly as practicable after the Final Payment Date. In
the case of any Shareholder who exercises his or her right to acquire Shares
pursuant to the Over-Subscription Privilege, any excess payment which would
otherwise be refunded to the Shareholder will be applied by the Fund toward
payment for additional Shares acquired pursuant to exercise of the
Over-Subscription Privilege. All payments by a Shareholder must be made in
United States dollars by money order or check drawn on a bank located in the
United States of America and payable to "Global High Income Dollar Fund Inc."
WHICHEVER OF THE METHODS OF PAYMENT DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL RECEIPT OF THE PURCHASE
PRICE BY THE FUND.
If an Exercising Shareholder does not make payment of any additional amounts
due by December 30, 2005, the Fund reserves the right to take any or all of the
following actions: (i) apply any payment received by it toward the purchase of
the greatest whole number of Shares which could be acquired by such Exercising
Shareholder upon exercise of the Primary Subscription and/or Over-Subscription
Privilege based on the amount of such payment; (ii) allocate the Shares subject
to subscription rights to one or more other Shareholders; (iii) sell all or a
portion of the Shares deliverable upon exercise of subscription rights on the
open market and apply the proceeds thereof to the amount owed; and/or
(iv) 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.
AN EXERCISING SHAREHOLDER WILL NOT HAVE THE RIGHT TO CANCEL THE EXERCISE OF
RIGHTS OR RESCIND A PURCHASE AFTER THE SUBSCRIPTION AGENT HAS RECEIVED PAYMENT,
EITHER BY MEANS OF A NOTICE OF GUARANTEED DELIVERY OR A CHECK OR MONEY ORDER,
EXCEPT AS DESCRIBED UNDER "THE OFFER--NOTICE OF NAV DECLINE OR INCREASE."
The risk of delivery of Exercise Forms and payments to the Subscription
Agent will be borne by the Exercising Shareholder and not the Fund, the
Subscription Agent or the Information Agent. If the mail is used to exercise
Rights, it is recommended that such Exercise Forms and payment 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 Fund and
clearance of payment before 5:00 p.m., Eastern time, on the Expiration Date.
Because uncertified personal checks may take at least five business days to
clear and may, at the discretion of the Fund, not be accepted if not cleared
before the Expiration Date, you are strongly encouraged to pay, or arrange for
payment, by means of certified or bank cashier's check.
NOTICE OF NAV DECLINE OR INCREASE
The Fund will suspend the Offer until it amends this Prospectus if, after
the effective date of this Prospectus, the Fund's NAV declines more than 10%
from its NAV as of that date or the NAV increases to an amount greater than the
net proceeds. In such event, the Fund will notify Shareholders of any such
decline or increase and permit Exercising Shareholders to cancel exercise of
their Rights. Shareholders will have their payment for additional Shares
returned to them if they opt to cancel the exercise of their Rights.
23
DELIVERY OF SHARE CERTIFICATES
Registered Shareholders who are participants in the Fund's Dividend
Reinvestment Plan will have any Shares that they acquire pursuant to the Offer
credited to their Shareholder dividend reinvestment accounts in the Dividend
Reinvestment Plan. Shareholders whose Shares are held of record by Cede or by
any other depository or nominee on their behalf or their broker-dealers' behalf
will have any Share that they acquire pursuant to the Offer credited to the
account of Cede or such other depository or nominee. With respect to all other
Shareholders, certificates for all Shares acquired pursuant to the Offer will be
mailed after payment for all the Shares subscribed for has cleared, which
clearance may take up to 15 days from the date of receipt of the Payment.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are, or acting on behalf of, employee benefit plans
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (including corporate savings and 401(k) plans), and plans that are
subject to Code Section 4975, such as profit sharing/retirement plans for
self-employed individuals and Individual Retirement Accounts (collectively,
"Retirement Plans") should be aware that additional contributions of cash to
Retirement Plans (other than rollover contributions or trustee-to-trustee
transfers from other Retirement Plans) to exercise Rights would be treated as
Retirement Plan contributions and therefore, when taken together with
contributions previously made, may be treated as excess or nondeductible
contributions and may be subject to excise taxes. In the case of Retirement
Plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), additional cash contributions could cause violations of
the maximum contribution limitations of Section 415 of the Code or other
qualification rules. Retirement Plans in which contributions are so limited
should consider whether there is an additional source of funds available within
the Retirement Plan, such as a reallocation from another investment option or
other liquidation of assets, with which to exercise the Rights. Because the
rules governing Retirement Plans are extensive and complex, Retirement Plans
contemplating the exercise of Rights should consult with their counsel before
such exercise.
Retirement Plans and other tax exempt entities should also be aware that if
they borrow to finance their exercise of Rights, they may become subject to the
tax on unrelated business taxable income under Section 511 of the Code. If any
portion of an Individual Retirement Account ("IRA") is used as security for a
loan, the portion so used will be treated as a distribution to the IRA
depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the Code
contain prohibited transactions rules that may affect the exercise of Rights.
Due to the complexity of these rules and the penalties for noncompliance,
Retirement Plans should consult with their counsel regarding the consequences of
their exercise of Rights under ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The following discussion summarizes the principal federal income tax
consequences of the Offer to Shareholders and Exercising Shareholders. It is
based upon the Code, US Treasury regulations, Internal Revenue Service rulings
and policies and judicial decisions in effect on the date of this Prospectus.
This discussion does not address all federal income tax aspects of the Offer
that may be relevant to a particular Shareholder because of his or her
individual circumstances or to Shareholders subject to special treatment under
the Code (such as insurance companies, financial institutions, tax-exempt
entities, dealers in securities, foreign corporations, and persons who are not
citizens or residents of the United States), and it does not address any state,
local or foreign tax consequences. Accordingly, each Shareholder should consult
his or her own tax advisor as to the specific tax consequences of the Offer
24
to him or her. Each Shareholder should also review the discussion of certain tax
considerations affecting the Fund and Shareholders set forth under "Taxation"
below.
For federal income tax purposes, neither the receipt nor the exercise of the
Rights by Shareholders will result in taxable income (or loss) to those
Shareholders, and no gain or loss will be realized if the Rights expire without
exercise.
A Shareholder's holding period for a Share acquired upon exercise of a Right
begins with the date of exercise. A Shareholder's basis for determining gain or
loss upon the sale of a Share acquired upon the exercise of a Right will be
equal to the sum of the Shareholder's basis in the Right, if any, and the
Subscription Price per Share. The Shareholder's basis in the Right will be zero
unless either (i) the fair market value of the Right on the date of distribution
is 15% or more of the fair market value on such date of the Shares with respect
to which the Right was distributed, or (ii) the Shareholder elects, on its
federal income tax return for the taxable year in which the Right is received,
to allocate part of the basis of such Shares to the Right. If either of clauses
(i) and (ii) is applicable, then if the Right is exercised, the Exercising
Shareholder will allocate its basis in the Shares with respect to which the
Right was distributed between such Shares and the Right in proportion to the
fair market values of each on the date of distribution. A Shareholder's gain or
loss recognized upon a sale of a Share acquired upon the exercise of a Right
will be a capital gain or loss (assuming the Share was held as a capital asset
at the time of sale) and will be a long-term capital gain or loss if the Share
was held at the time of sale for more than one year.
The foregoing is only a summary of the applicable federal income tax laws
presently in effect and does not include any state or local tax consequences of
the Offer. Moreover, the foregoing does not address the many factors that may
determine whether an investor will be liable for the federal alternative minimum
tax. You should consult your own tax advisor concerning the tax consequences of
this transaction.
SPECIAL CONSIDERATIONS
Shareholders who do not fully exercise their Rights should expect that they
will, at the completion of the Offer, own a smaller proportional interest in the
Fund than would otherwise be the case if they exercised their Rights. The Fund
cannot determine the extent of this dilution at this time because it does not
know what proportion of the Fund's Shares will be purchased as a result of the
Offer.
Shareholders may experience dilution in their holdings because they will
indirectly bear the expenses of the Offer, which are paid by the Fund. Further,
Shareholders that do not submit subscription requests pursuant to the
Over-Subscription Privilege may also experience dilution in their holdings if
the Fund offers additional Shares for subscription. As of November 10, 2005, the
Fund's Shares traded at a 3.66% premium above NAV. Although some rights
offerings may also experience NAV dilution, if the Fund's Shares trade at a
premium above NAV as of the Expiration Date, the Fund estimates that such
dilution, if any, would be minimal. See "Special Considerations and Risk
Factors--Dilution--Effect of Non-Participation in the Offer." Except as
described in this Prospectus, you will have no right to rescind your
subscription requests after receipt of your payment for Shares by the
Subscription Agent.
RESTRICTION ON NON-US SHAREHOLDERS
Shareholders on the Record Date whose record addresses are outside the
United States will be given written notice of the Offer; however, Exercise Forms
will not be mailed to such Shareholders. The Rights to which those Exercise
Forms relate will be held by the Subscription Agent for such non-US
Shareholders' accounts until instructions are received in writing with payment
to exercise the
25
Rights. If no such instructions are received by the Expiration Date, such Rights
will expire. See "Subscription Agent."
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at an estimated Subscription
Price of $16.75 per share (the "Estimated Subscription Price"), the net proceeds
of the Offer will be approximately 108,651,641, after deducting expenses payable
by the Fund estimated at approximately $389,000. The net proceeds of the Offer
will be invested in accordance with the Fund's investment objectives and
policies. See "Investment Objectives and Policies." UBS Global AM anticipates
that investment of the net proceeds may take up to one month (but in no event
later than three months) from their receipt by the Fund, depending on market
conditions and the availability of appropriate securities. Pending such
investment, the proceeds will be held in obligations of the US Government, its
agencies or instrumentalities, or highly rated money market instruments.
THE FUND
The Fund is a non-diversified, closed-end management investment company and
has registered under the Investment Company Act of 1940 ("1940 Act"). The Fund
was incorporated under the laws of the State of Maryland on February 23, 1993
and commenced operations on October 8, 1993. As of November 10, 2005, the Fund
has 19,439,667 Shares of common stock issued and outstanding. As of
November 10, 2005, the Fund's total assets were $327,013,410.
The Fund's common stock is traded on the New York Stock Exchange, Inc.
("NYSE") under the symbol "GHI." The Fund's principal office is located at 51
West 52nd Street, New York, New York 10019-6114, and its telephone number is
212-882-5000.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 100 million shares of capital stock, $.001
par value. The Board is authorized to classify and reclassify any unissued
shares of capital stock from time to time by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or terms and conditions of redemption of such shares
by the Fund. The information contained under this heading is subject to the
provisions contained in the Fund's Articles of Incorporation and By-Laws.
There were 19,439,667 Shares outstanding as of the Record Date. Assuming
that all Rights are exercised an additional 6,509,889 Shares will be issued. The
Fund may, at its discretion, issue up to an additional 25% of the Shares in the
Offer to honor over-subscription requests if sufficient Shares are not available
from the Primary Subscription to honor all over-subscriptions.
As of November 4, 2005, to the best of the Fund's knowledge, there was no
person who controlled the Fund.
SHARE PRICE AND NAV
The Fund's Shares are publicly held and have been listed and are trading on
the NYSE. The following table sets forth for the quarters indicated the high and
low closing prices per Share on the NYSE, the corresponding NAV, the percentage
premium or discount at such closing prices, and the
26
number of Shares traded. The NAV as of the close of business on November 10,
2005 was $15.84 and the last reported sales price of a Share that day was
$16.42, representing a 3.66% premium to NAV.
MARKET CORRESPONDING MARKET CORRESPONDING
PRICE(1) NET ASSET PREMIUM/ PRICE(1) NET ASSET PREMIUM/ TRADING
QUARTER ENDING HIGH VALUE(2) (DISCOUNT)(2) LOW VALUE(2) (DISCOUNT)(2) VOLUME
-------------- -------- ------------- ------------- --------- ------------- ------------- -------------
Fiscal 2003
January 31, 2003....... $15.38 $14.72 4.48% $13.84 $14.17 (2.33)% 1,343,300
April 30, 2003......... 16.15 15.79 2.28 14.86 14.68 1.23 2,004,900
July 31, 2003.......... 17.98 16.78 7.15 16.26 15.94 2.01 3,055,700
October 31, 2003....... 17.42 16.06 8.47 15.40 15.22 1.18 1,926,100
Fiscal 2004
January 31, 2004....... 18.30 16.24 12.68 17.07 15.92 7.22 1,643,200
April 30, 2004......... 18.90 16.34 15.67 15.38 15.67 (1.85) 2,887,400
July 31, 2004.......... 16.75 15.48 8.20 13.85 14.73 (5.97) 2,442,100
October 31, 2004....... 18.34 16.34 12.24 16.75 15.48 8.20 1,782,000
Fiscal 2005
January 31, 2005....... 20.04 16.89 18.65 17.37 15.59 11.42 2,927,800
April 30, 2005......... 19.48 15.86 22.82 16.44 15.39 6.82 1,875,300
July 31, 2005.......... 17.48 15.15 15.37 15.85 15.28 3.73 1,504,600
October 31, 2005....... 17.95 16.04 11.91 17.11 15.57 9.89 1,710,000
-------------------
(1) As reported by the NYSE.
(2) Based on the Fund's computations, on the day that the high or low market
price was recorded or the nearest date on which the Fund calculated its NAV
as the Fund does not calculate its NAV each day.
Shares of the Fund have traded at both a premium to NAV and a discount to
NAV. There can be no assurance that Shares will trade at premium to NAV in the
future.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to achieve a high level of
current income. As a secondary objective, the Fund seeks capital appreciation,
to the extent consistent with its primary objective. The Fund is designed for
investors willing to assume additional risk in return for the potential for high
current income. The Fund is not intended to be a complete investment program or
provide a diversified multi-asset class strategy. There is no assurance that the
Fund will achieve its investment objectives.
Under normal market conditions, the Fund invests at least 65% of its total
assets in debt securities of issuers located in emerging market countries. The
Fund's investment in debt securities will consist of (i) debt securities issued
or guaranteed by governments, their agencies, instrumentalities or political
subdivisions located in emerging market countries, or by central banks located
in emerging market countries (collectively, "Sovereign Debt"); (ii) interests in
issuers organized and operated for the purpose of securitizing or restructuring
the investment characteristics of Sovereign Debt; and (iii) debt securities
issued by banks and other business entities located in emerging market countries
or issued by banks and other business entities not located in emerging market
countries but denominated in or indexed to the currencies of emerging market
countries. Under normal circumstances, the Fund invests at least 80% of its net
assets in US dollar-denominated debt securities.
27
As used in this Prospectus, emerging market countries generally include
every country in the world other than the United States, Canada, Japan,
Australia, New Zealand and most Western European countries. Currently, investing
in many emerging market countries may not be desirable or feasible, due to the
lack of adequate custody arrangements for the Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. The Fund
expects its investments in emerging market securities to be made primarily in
some or all of the following emerging market countries:
Algeria
Argentina
Bolivia
Botswana
Brazil
Bulgaria
Chile
China
Colombia
Costa Rica
Croatia
Czech Republic
Dominican Republic
Ecuador
Estonia
Ghana
Greece
Hungary
India
Indonesia
Israel
Ivory Coast
Jamaica
Jordan
Kazakhstan
Kenya
Korea
Lebanon
Lithuania
Latvia
Malaysia
Mexico
Morocco
Nigeria
Oman
Pakistan
Panama
Peru
Philippines
Poland
Portugal
Romania
Russia
Slovakia
Slovenia
Singapore
South Africa
Thailand
Trinidad & Tobago
Turkey
Uruguay
Ukraine
Venezuela
Zambia
Zimbabwe
As opportunities to invest in debt securities in other emerging market
countries develop, the Fund expects to expand and further diversify the emerging
market countries in which it invests. While the Fund generally is not restricted
in the portion of its assets which may be invested in a single country or
region, under normal conditions, the Fund's assets are invested in issuers
located in at least three countries.
Debt securities held by the Fund may take the form of bonds, notes, bills,
debentures, convertible securities, warrants (as defined herein), bank debt
obligations, short-term paper, loan participations, assignments and interests
issued by entities organized and operated for the purpose of restructuring the
investment characteristics of Sovereign Debt. These securities may include US
dollar-denominated bonds sold in the United States ("Yankee bonds") and bonds
denominated in US dollars or other currencies and sold to investors outside the
United States ("Eurobonds"). The Fund is not subject to restrictions on the
maturities of the debt securities it holds.
28
Some Sovereign Debt instruments in which the Fund invests are likely to be
acquired at a discount. Pursuant to the Internal Revenue Code, the Fund is
required to accrue a portion of any original issue discount with respect to such
securities as income each year even though the Fund does not receive interest
payments in cash during the year which reflect the discount so accrued. The Fund
may also elect similar treatment for any market discount with respect to such
securities. As a result, the Fund expects to make annual distributions of net
investment income in amounts greater than the total amount of cash it actually
receives. Such distributions may be made from the cash assets of the Fund, from
borrowings or by liquidation of portfolio securities. Such liquidation of
portfolio securities may be made at times or in market conditions or at market
prices that may not be advantageous to the Fund. The risks associated with
holding securities that are not readily marketable may be accentuated at such
time. See "Special Considerations and Risk Factors--Illiquid Securities" and
"Taxation."
Under normal circumstances, the Fund invests at least 80% of its net assets
in US dollar-denominated debt securities. The Fund may also invest up to 20% of
its net assets in non-US dollar-denominated debt securities under normal
circumstances. These investments may be denominated in the local currencies of
emerging market countries, as well as in reserve currencies such as the British
Pound Sterling, the Euro, the Canadian Dollar, the Japanese Yen and the Swiss
Franc. Although the Fund is permitted to engage in a wide variety of investment
practices designed to hedge against currency exchange rate risks with respect to
its holdings of non-US dollar-denominated debt securities, the Fund may be
limited in its ability to hedge against these risks. These non-US
dollar-denominated investments may include debt securities (i) of issuers
located in emerging market countries or (ii) of issuers not located in emerging
market countries that are denominated in or indexed to the currencies of
emerging market countries. The Fund may, in the future, seek Board approval to
increase the percentage of net assets that may be invested in non-US
dollar-denominated debt securities. UBS Global AM may recommend such an increase
to, among other things, enable the Fund to more closely track a benchmark index
it uses as a reference. See "Other Investment Practices--Strategic
Transactions."
When UBS Global AM believes unusual circumstances warrant a defensive
posture, the Fund temporarily may commit all or any portion of its assets to
cash (US dollars or foreign currencies) or money market instruments of US or
foreign issuers, including repurchase agreements. Under normal market
conditions, the fund may commit up to 20% of its net assets to cash (US dollars)
as well as invest up to a total of 35% of its total assets in a combination of
cash (US dollars) and US dollar-denominated money market instruments of US
issuers, including repurchase agreements, for liquidity purposes (such as
clearance of portfolio transactions, the payment of dividends and expenses and
share repurchases) or as part of its ordinary investment activities. The fund's
investments in US dollar-denominated money market instruments are considered to
be investment in US dollar-denominated debt securities for purposes of the 80%
minimum noted earlier.
UBS Global AM selectively invests the Fund's assets in securities of issuers
in countries where the combination of fixed income market returns, the price
appreciation potential of fixed income securities and, with respect to non-US
dollar-denominated securities, currency exchange rate movements present
opportunities for high current income and, secondarily, capital appreciation.
Assets are allocated among various countries based upon UBS Global AM's analysis
of credit risk of the universe of emerging market country issuers and the
factors noted above. Emerging market country sovereign credit analysis may
include an evaluation of the issuing country's total debt levels, currency
reserve levels, net exports/ imports, overall economic growth, level of
inflation, currency fluctuation, political and social climate and payment
history. Particular debt securities may be selected based upon credit risk
analysis of potential issuers, the characteristics of the security and interest
rate sensitivity of the various debt issues for a single issuer, analysis of
volatility and liquidity of these particular debt instruments, and the tax
implications of various instruments to the Fund. The debt securities in which
the Fund may invest will not be required to meet a minimum rating standard and
may not be rated by any internationally recognized securities rating
organization.
29
As of the end of the fiscal year ended October 31, 2004, the Fund had 89.8%
of its dollar weighted average portfolio in debt securities that received a
rating from an internationally recognized securities rating organization, and
6.0% of its dollar weighted average portfolio in debt securities that were not
so rated. The Fund had the following percentages of its dollar weighted average
portfolio invested in rated securities: A/A--4.7%, BBB/Baa--25.9%, BB/Ba--41.3%,
and B/B--8.6%, CCC/ Caa--9.3%, Non-Rated--6.0%, Cash Equivalents and Other
assets less liabilities--4.2%. It should be noted that this information reflects
the average composition of the Fund's assets as of the end of the fiscal year
ended October 31, 2004 and is not necessarily representative of the Fund's
assets as of any other time in that period, the current fiscal year or at any
time in the future.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a foreign government and one or more
financial institutions ("Lenders"). The Fund's investments in Loans are expected
in most instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Fund generally has no direct right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan ("Loan Agreement"), nor any rights of set-off against the borrower, and the
Fund may not directly benefit from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. The Fund will acquire
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by UBS Global AM to be creditworthy. When the Fund
purchases Assignments from Lenders, the Fund will acquire direct rights against
the borrower on the Loan. However, since Assignments are arranged through
private negotiations between potential assignees and assignors, the rights and
obligations acquired by the Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
Because there is no liquid market for such securities, the Fund anticipates that
such securities could be sold only to a limited number of institutional
investors. The lack of a liquid secondary market may have an adverse impact on
the value of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower.
STRUCTURED INVESTMENTS
The Fund may invest a portion of its assets in interests in entities
organized and operated solely for the purpose of securitizing or restructuring
the investment characteristics of Sovereign Debt. This type of securitizing or
restructuring involves the deposit with or purchase by a US or foreign entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans) and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Investments of the type
in which
30
the Fund invests typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that is
either subordinated or not subordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Structured
Investments are typically sold in private placement transactions, and there
currently is no active trading market for Structured Investments.
OTHER INVESTMENTS
ZERO COUPON SECURITIES. The Fund may invest in "zero coupon" and other deep
discount securities of governmental or private issuers. Zero coupon securities
generally pay no cash interest to their holders prior to maturity. Accordingly,
such securities usually are issued and traded at a deep discount from their face
or par value and generally are subject to greater fluctuations of market value
in response to changing interest rates than securities of comparable maturities
and credit quality that pay cash interest on a current basis.
Federal tax law requires that a holder of a zero coupon security accrue a
portion of the original issue discount on the security as income each year, even
though the holder receives no interest payment on the security during the year.
Federal tax law also requires that companies such as the Fund which seek to
qualify for pass-through federal income tax treatment as regulated investment
companies distribute substantially all of their net investment income each year,
including non-cash income. Accordingly, although the Fund will receive no
payments on its zero coupon securities prior to their maturity or disposition,
it will have income attributable to such securities and it will be required, in
order to maintain the desired tax treatment, to include in its dividends an
amount equal to the income attributable to its zero coupon securities. Such
dividends will be paid from the cash assets of the Fund, from borrowings or by
liquidation of portfolio securities, if necessary, at a time that the Fund
otherwise might not have done so. To the extent the Fund is required to
liquidate thinly traded securities, it may be able to sell such securities only
at prices lower than if such securities were more widely traded. To the extent
the proceeds from any such dispositions are used by the Fund to pay
distributions, it will not be able to purchase additional income-producing
securities with such proceeds, and as a result its current income ultimately may
be reduced. See "Taxation."
PRIVATE PLACEMENTS. The Fund may invest in emerging market securities that
are sold in private placement transactions between their issuers and their
purchasers and that are neither listed on an exchange nor traded in the OTC
secondary market. In many cases, privately placed securities will be subject to
contractual or legal restrictions on transfer. As a result of the absence of a
public trading market, privately placed securities may in turn be less liquid
and more difficult to value than publicly traded securities. Although privately
placed securities may be resold in privately negotiated transactions, the prices
realized from the sales could, due to illiquidity, be less than those originally
paid by the Fund or less than if such securities were more widely traded. In
addition, issuers whose securities are not publicly traded may not be subject to
the disclosure and other investor protection requirements that may be applicable
if their securities were publicly traded. If any privately placed securities
held by the Fund are required to be registered under the securities laws of one
or more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is
31
redeemed, converted or exchanged. Convertible securities have unique investment
characteristics in that they generally (i) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (ii) are
less subject to fluctuation in value than the underlying stock since they have
fixed income characteristics, and (iii) provide the potential for capital
appreciation if the market price of the underlying common stock increases. Most
convertible securities currently are issued by US companies, although a
substantial Eurodollar convertible securities market has developed, and the
markets for convertible securities denominated in local currencies are
increasing. The Fund generally does not convert any convertible securities it
may own into common stock or hold them as common stock, although it may do so
for temporary purposes.
EQUITY SECURITIES. The Fund may acquire equity securities (including common
stocks, rights and warrants for equity and fixed income securities) when
attached to fixed income securities or as part of a unit including fixed income
securities, or in connection with a conversion or exchange of fixed income
securities. The prices of equity securities generally fluctuate more than other
securities and reflect changes in a company's financial condition and in overall
market and economic conditions. It is possible that the Fund may experience a
substantial or complete loss on an individual equity security.
WARRANTS. The Fund may acquire warrants for equity securities, debt
securities and commodities that are acquired as units with debt securities.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other securities or commodities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to its expiration
date. The Fund generally expects to sell any common stock or commodity received
upon the exercise of a warrant as promptly as practicable and in a manner that
it believes will reduce its risk of a loss in connection with the sale.
INVESTMENT IN OTHER INVESTMENT COMPANIES. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the 1940 Act, the Fund may purchase
the securities of other investment companies if immediately thereafter not more
than (i) 3% of the total outstanding voting stock of any such company is owned
by the Fund, (ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets, taken at
market value, would be invested in such securities, and (iv) the Fund, together
with other investment companies having the same investment adviser and companies
controlled by such companies, owns not more than 10% of the total outstanding
stock of any one closed-end investment company. If the Fund acquires shares in
other investment companies, stockholders would bear both their proportionate
share of expenses in the Fund (including investment advisory and administrative
fees) and, indirectly, the expenses of such investment companies (including
investment advisory and administrative fees).
INDEXED DEBT SECURITIES. The Fund may invest in debt securities issued by
banks and other business entities not located in emerging market countries that
are indexed to certain specific foreign currency exchange rates. The terms of
such securities provide that their principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligations are outstanding. While such
securities offer the potential for an attractive rate of return, they also
entail the risk of loss of principal. New forms of such securities continue to
be developed. The Fund may invest in such securities to the extent consistent
with its investment objectives.
32
OTHER INVESTMENT PRACTICES
STRATEGIC TRANSACTIONS
The Fund may use options (both exchange-traded and OTC) and forward currency
contracts to attempt to enhance income and realize gains and also may attempt to
reduce the overall risk of its investments (hedge) by using options, futures
contracts and forward currency contracts. Hedging strategies may also be used in
an attempt to manage the Fund's average duration, foreign currency exposure and
other risks of the Fund's investments, which can affect fluctuations in the
Fund's net asset value. The Fund's ability to use these strategies may be
limited by market conditions, regulatory limits and tax considerations. There
can be no assurance that the use of these strategies will succeed. The SAI
contains further information on these strategies.
The Fund may purchase and sell call and put options on bond indices and
securities in which the Fund is authorized to invest for hedging purposes or to
enhance income. The Fund also may purchase and sell interest rate futures
contracts and options thereon, may purchase and sell covered straddles on
securities, bond indices or currencies or options on futures contracts on
securities or currencies. The Fund may enter into options, futures contracts and
forward currency contracts under which up to 100% of the Fund's portfolio is at
risk.
The Fund may enter into forward currency contracts for the purchase or sale
of a specified currency at a specified future date, either with respect to
specific transactions or with respect to its portfolio positions. For example,
when UBS Global AM anticipates making a currency exchange transaction in
connection with the purchase or sale of a security, the Fund may enter into a
forward contract in order to set the exchange rate at which the transaction will
be made. The Fund also may enter into a forward contract to sell an amount of a
foreign currency approximating the value of some or all of the Fund's securities
positions denominated in such currency. The Fund may use forward contracts in
one currency or a basket of currencies to hedge against fluctuations in the
value of another currency when UBS Global AM anticipates there will be a
correlation between the two and may use forward currency contracts to shift a
Fund's exposure to foreign currency fluctuations from one country to another.
The purpose of entering into these contracts is to minimize the risk to the Fund
from adverse changes in the relationship between the US and foreign currencies.
The Fund may also purchase and sell foreign currency futures contracts, options
thereon and options on foreign currencies to hedge against the risk of
fluctuations in market value of foreign securities the Fund holds in its
portfolio, or that it intends to purchase, resulting from changes in foreign
exchange rates. In addition, the Fund may purchase and sell options on foreign
currencies and use forward currency contracts to enhance income.
The Fund may enter into interest rate protection transactions, including
interest rate swaps, caps, floors and collars, to preserve a return or spread on
a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date or to effectively fix the rate of interest that it pays on one or more
borrowings or series of borrowings. The Fund enters into interest rate
protection transactions only with banks and recognized securities dealers
believed by UBS Global AM to present minimal credit risks.
The Fund might not employ any of the strategies described above, and no
assurance can be given that any strategy used will succeed. If UBS Global AM
incorrectly forecasts interest or currency exchange rates, market values or
other economic factors in utilizing a strategy for the Fund, then the Fund would
have been in a better position if it had not hedged at all. The use of these
strategies involves certain special risks, including (i) the fact that skills
needed to use hedging instruments are different from those needed to select the
Fund's securities, (ii) possible imperfect correlation, or even no correlation,
between price movements of hedging instruments and price movements of the
investments being hedged, (iii) the fact that, while hedging strategies can
reduce the risk of loss, they can also reduce the opportunity for gain, or even
result in losses, by offsetting favorable price movements
33
in hedged investments, and (iv) the possible inability of the Fund to purchase
or sell a portfolio security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions and the possible
inability of the Fund to close out or to liquidate its hedged position.
Only a limited market, if any, currently exists for hedging instruments
relating to securities or currencies in most emerging market countries.
Accordingly, under present circumstances, the Fund does not anticipate that it
normally will be able to effectively hedge its currency exposure or investment
in such markets.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and tax considerations.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities on a "when-issued" basis or may purchase or
sell securities on a "delayed delivery" basis, I.E., for issuance or delivery to
the Fund later than the normal settlement date for such securities at a stated
price and yield. The Fund generally would not pay for such securities or start
earning interest on them until they are received. However, when the Fund
undertakes a when-issued or delayed delivery obligation, it immediately assumes
the risks of ownership, including the risk of price fluctuation. When the Fund
agrees to purchase securities on a when-issued or delayed delivery basis, its
custodian will set aside in a segregated account cash or liquid securities,
marked to market daily, in an amount at least equal to the amount of the
commitment. Failure of the issuer to deliver a security purchased by the Fund on
a when-issued or delayed delivery basis may result in the Fund's incurring a
loss or missing an opportunity to make an alternative investment. Depending on
market conditions, the Fund's when-issued and delayed delivery purchase
commitments could cause its net asset value per Share to be more volatile,
because such securities may increase the amount by which the Fund's total
assets, including the value of when-issued and delayed delivery securities held
by the Fund, exceed its net assets.
LEVERAGE AND BORROWING
The Fund may, although it has no intention to do so as of the date of this
Prospectus, engage in borrowings for investment purposes to the extent permitted
under the 1940 Act. For more information, see "Additional Information about
Investment Policies and Restrictions" in the SAI.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that UBS
Global AM deems qualified, but only when the borrower maintains acceptable
collateral with the Fund's custodian in an amount, marked to market daily, at
least equal to the market value of the securities loaned, plus accrued interest
and dividends. Acceptable collateral is limited to cash, US government
securities and irrevocable letters of credit that meet certain guidelines
established by UBS Global AM. The Fund may reinvest any cash collateral in money
market instruments or other short-term liquid investments, including repurchase
agreements and other investment companies. The Fund may also reinvest cash
collateral in private investment vehicles similar to money market funds,
including one managed by UBS Global AM. In determining whether to lend
securities to a particular broker-dealer or institutional investor, UBS Global
AM will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Fund will retain authority to terminate any loans at any time.
34
The Fund may pay reasonable administrative and custodial fees in connection with
a loan and may pay a negotiated portion of the interest earned on the cash held
as collateral to the borrower or placing broker. The Fund will retain authority
to terminate any loan at any time. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash held as collateral to the borrower or placing
broker. The Fund will receive reasonable interest on the loan or a flat fee from
the borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. The Fund will regain record ownership of
loaned securities to exercise beneficial rights, such as voting and subscription
rights, when regaining such rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the board governing the fund's securities
lending program, UBS Securities LLC ("UBS Securities"), another wholly owned
indirect subsidiary of UBS AG, has been retained to serve as lending agent for
the fund. The board also has authorized the payment of fees (including fees
calculated as a percentage of invested cash collateral) to UBS Securities for
these services. The board periodically reviews all portfolio securities loan
transactions for which UBS Securities has acted as lending agent. UBS Securities
and other affiliated broker-dealers have also been approved as borrowers under
the fund's securities lending program.
ILLIQUID SECURITIES
The Fund may invest without limitation in illiquid securities. The term
"illiquid securities" for this purpose means securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities and includes, among other
things, restricted securities (other than Rule 144A securities UBS Global AM has
determined are liquid pursuant to guidelines established by the Fund's Board)
and repurchase agreements maturing in more than seven days.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act").
Such securities include those that are subject to restrictions contained in
the securities laws of other countries. However, securities that are freely
marketable in the country where they are principally traded, but would not be
freely marketable in the United States, will not be considered illiquid. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.
While certain restricted securities may be illiquid, not all restricted
securities are illiquid. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act,
including private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments. For further information on illiquid securities,
see "Special Considerations and Risk Factors--Illiquid Securities."
35
REPURCHASE AGREEMENTS
The Fund may use repurchase agreements. Repurchase agreements are
transactions in which the Fund purchases securities or other obligations from a
bank or securities dealer (or its affiliate) and simultaneously commits to
resell them to the counterparty at an agreed-upon date or upon demand and at a
price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased obligations. The Fund maintains custody of the
underlying obligations prior to their repurchase, either through its regular
custodian or through a special "tri-party" custodian or sub-custodian that
maintains separate accounts for both the fund and its counterparty. Thus, the
obligation of the counterparty to pay the repurchase price on the date agreed to
or upon demand is, in effect, secured by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by the Fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements involving
obligations other than US government securities (such as commercial paper,
corporate bonds and mortgage loans) may be subject to special risks and may not
have the benefit of certain protections in the event of the counterparty's
insolvency. If the seller or guarantor become insolvent, a fund may suffer
delays, costs and possible losses in connection with the disposition of
collateral. The Fund intends to enter into repurchase agreements only in
transactions with counterparties believed by UBS Global AM to present minimum
credit risks.
TEMPORARY AND DEFENSIVE INVESTMENTS
When UBS Global AM believes circumstances warrant a defensive posture, the
Fund temporarily may commit all or any portion of its assets to cash (US dollars
or foreign currencies) or money market instruments of US or foreign issuers,
including repurchase agreements. In addition, the Fund may commit up to 35% of
its assets to cash (US dollars) or US dollar-denominated money market
instruments of US issuers, including repurchase agreements, for liquidity
purposes (such as clearance of portfolio transactions, the payment of dividends,
distributions and expenses and share repurchases) or pending investment.
OTHER INFORMATION
The Fund's investment objectives, its classification as a non-diversified
investment company and certain investment limitations as described in the SAI
are fundamental policies that may not be changed without stockholder approval.
All other investment policies may be changed by the Fund's Board without
stockholder approval.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate may vary from year to year and will not
be a limiting factor when UBS Global AM deems portfolio changes appropriate.
Higher portfolio turnover (100% or more) will result in higher Fund expenses,
including brokerage commissions, dealer mark-ups and other transaction costs on
the sale of securities and on reinvestment in other securities and may result in
more short-term capital gains. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose
36
maturities at the time of acquisition were one year or less) by the monthly
average value of the long-term securities in the portfolio during the year.
SPECIAL CONSIDERATIONS AND RISK FACTORS
An investment in the Shares of the Fund involves a high degree of risk. You
should carefully consider the following risk factors in addition to the other
information set forth in this Prospectus. For additional information about the
risks that may be associated with an investment in the Fund, see "Additional
Information About Investment Policies; Investment Limitations and Restrictions"
in the SAI.
DILUTION; EFFECT OF NON-PARTICIPATION IN THE OFFER. As a result of the terms
of the Offer, Shareholders who do not fully exercise their Rights, including the
Over-Subscription Privilege, will, at the completion of the Offer, own a smaller
proportional interest in the Fund than they owned before the Offer. Although
some rights offerings may also experience NAV dilution, if the Fund's Shares
trade at a premium above NAV, the Fund estimates that such dilution, if any,
would be minimal. Since October 8, 1993 (commencement of operations), Shares of
the Fund have traded at various times at, above and below the NAV.
YIELD DILUTION (ACCRETION). It is possible that the Offer could result in
dilution of the Fund's gross yield. Dilution of the Fund's gross yield could
occur if the proceeds of the Offer are invested in securities that provide a
yield below current portfolio yield. Any reduction in gross yield may be taken
into account in further re-evaluations of the distribution rate paid under the
Fund's managed distribution policy. It is also possible that the Offer could
have the opposite effect and result in the accretion of the Fund's yield which
would occur if the proceeds of the Offer are invested in securities that provide
a yield above the Fund's current portfolio yield.
SHARE PRICE VOLATILITY. Volatility in the market price of Shares may
increase during the rights offering period. The Offer may result in some
Shareholders selling their Shares, which could exert downward price pressure on
the price of Shares, while others wishing to participate in the Offer may buy
Shares, having the opposite impact.
UNDER-SUBSCRIPTION. It is possible that the Offer will not be fully
subscribed. Under-subscription of the Offer could have an impact on the ratios
and the net proceeds of the Offer.
MARKET PRICE AND NAV OF SHARES. Although the Shares have traded at a premium
to their NAV for 102 out of 105 weeks since November 7, 2003, shares of
closed-end investment companies such as the Fund frequently trade at a discount
to their net asset values. The last time the Shares traded at a discount was in
May 2004. Whether an investor will realize gains or losses upon the sale of
Shares will not depend directly upon changes in the Fund's net asset value, but
will depend upon whether the market price of the Shares at the time of sale is
above or below the investor's purchase price for the Shares. The market price of
Shares is determined by such factors as relative demand for and supply of Shares
in the market, general market and economic conditions, changes in the Fund's net
asset value and other factors beyond the control of the Fund. This market risk
is separate and distinct from the risk that the Fund's net asset value may
decrease. Accordingly, the Shares are designed primarily for long-term
investors. Investors in the Shares should not view the Fund as a vehicle for
trading purposes. Since its initial public offering, Shares have traded at
various times at both a discount and a premium to NAV. The risk that the Shares
may trade at a discount to NAV may be greater for investors expecting to sell
their Shares in a relatively short period of time. Since the inception of the
Fund in October 1993, the longest consecutive period during which the Shares of
the Fund traded at a discount to NAV was 406 weeks and the longest consecutive
period during which Shares of the Fund traded at a premium to NAV was
approximately 77 weeks. The Fund cannot predict whether the Shares will trade in
the future at, above or below NAV.
37
GENERAL RISK FACTORS RELATED TO THE FUND'S INVESTMENTS
Investments in Emerging Market Securities. Investments in emerging market
securities involve risks relating to political and economic developments abroad,
as well as those that result from the differences between the regulations to
which US and emerging market issuers are subject. The economies of individual
emerging market countries may differ favorably or unfavorably from the US
economy in such respects as growth of gross domestic product, rate of inflation,
currency depreciation, capital reinvestment, resource self-sufficiency and
balance of payments position. Further, the economies of developing countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. These economies also have been and may continue to be adversely affected
by economic conditions in the countries with which they trade.
With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability, terrorist attacks or diplomatic
developments (including war) which could affect adversely the economies of such
countries or the value of the Fund's investments in those countries.
Foreign investment in certain emerging market country debt securities is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging market country
debt securities and increase the costs and expenses of the Fund. Certain
emerging market countries require governmental approval prior to investments by
foreign persons, limit the amount of investment by foreign persons in a
particular issuer, limit the investment by foreign persons only to a specific
class of securities of an issuer that may have less advantageous rights than the
classes available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging market countries may
also restrict investment opportunities in issuers in industries deemed important
to national interests.
Emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market country's balance of payments, the country could impose
temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments. Investing in local markets in
emerging market countries may require the Fund to adopt special procedures, seek
local government approvals or take other actions, each of which may involve
additional costs to the Fund.
No established secondary markets may exist for many of the emerging market
country debt securities in which the Fund may invest. Reduced secondary market
liquidity may have an adverse effect on market price and the Fund's ability to
dispose of particular instruments when necessary to meet its liquidity
requirements or in response to specific economic events such as a deterioration
in the creditworthiness of the issuer. Reduced secondary market liquidity for
certain emerging market country debt securities may also make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Market quotations are generally
available on many emerging country debt securities only from a limited number of
dealers and may not necessarily represent firm bids of those dealers or prices
for actual sales.
Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the US and other major markets. There also may
be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets, and enforcement of existing regulations
has been extremely limited.
38
Many of the emerging market securities held by the Fund are not registered
with the SEC, nor are the issuers thereof subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by the Fund than is available concerning US
companies. Foreign companies, and in particular, companies in smaller and
emerging capital markets are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to US companies. The Fund's net investment income
and/or capital gains from its foreign investment activities may be subject to
non-US withholding taxes.
Additionally, because the Fund may invest up to 20% of its net assets in
non-US dollar-denominated securities, changes in foreign currency exchange rates
will affect the Fund's net asset value, the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income to be distributed to shareholders by the Fund. If the value of a foreign
currency rises against the US dollar, the value of Fund assets denominated in
such currency will increase; correspondingly, if the value of a foreign currency
declines against the US dollar, the value of Fund assets denominated in such
currency will decrease. The exchange rates between the US dollar and other
currencies can be volatile and are determined by factors such as supply and
demand in the currency exchange markets, international balances of payments,
government intervention, speculation and other economic and political
conditions. In addition, some foreign currency values may be volatile and there
is the possibility of governmental controls on currency exchange or governmental
intervention in currency markets. Any of these factors could affect the Fund.
The costs attributable to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding or
other government taxes that could reduce the return of these securities. Tax
treaties between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign taxes to which the Fund would be subject.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of the Fund are uninvested and no return is earned thereon. The inability
of the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of a portfolio security due to settlement problems could result either in losses
to the Fund due to subsequent declines in the value of such portfolio security
or, if the Fund has entered into a contract to sell the security, could result
in possible liability to the purchaser.
SOVEREIGN DEBT
Investments in Sovereign Debt involve special risks. Certain emerging market
countries have historically experienced, and may continue to experience, high
rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, balance of payments and trade difficulties and extreme
poverty and unemployment. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt, and
the Fund may have limited legal recourse in the event of default.
39
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank loans to the same sovereign entity may not
contest payments to the holders of Sovereign Debt in the event of default under
commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency.
Another factor bearing on the ability of a country to repay Sovereign Debt
is the level of the country's international reserves. Fluctuations in the level
of these reserves can affect the amount of foreign exchange readily available
for external debt payments and, thus, could have a bearing on the capacity of
the country to make payments on its Sovereign Debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (E.G., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt obligations
can be affected by a change in international interest rates since the majority
of these obligations carry interest rates that are adjusted periodically based
upon international rates.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments, such as
military coups, have occurred in the past in countries in which the Fund may
invest and could adversely affect the Fund's assets should these conditions or
events recur. While UBS Global AM intends to manage the Fund's portfolio in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the Fund to suffer a loss of
interest or principal on any of its holdings.
With respect to Sovereign Debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Since 1982, certain emerging market countries have experienced difficulty in
servicing their Sovereign Debt on a timely basis which led to defaults on
certain obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting
40
outstanding principal and unpaid interest to Brady Bonds ("Brady Bonds" are debt
securities issued under the framework of the Brady Plan, an initiative announced
by former US Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for
debtor nations to restructure their outstanding external commercial bank
indebtedness), and obtaining new credit to finance interest payments. Holders of
Sovereign Debt, including the Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to sovereign debtors. The
interests of holders of Sovereign Debt could be adversely affected in the course
of restructuring arrangements or by certain other factors referred to below.
Furthermore, some of the participants in the secondary market for Sovereign Debt
may also be directly involved in negotiating the terms of these arrangements and
may therefore have access to information not available to other market
participants. Obligations arising from past restructuring agreements may affect
the economic performance and political and social stability of certain issuers
of Sovereign Debt. There is no bankruptcy proceeding by which Sovereign Debt on
which a sovereign has defaulted may be collected in whole or in part.
Foreign investment in certain Sovereign Debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in such Sovereign Debt and increase the costs and expenses of
the Fund. Certain countries in which the Fund will invest require governmental
approval prior to investments by foreign persons, limit the amount of investment
by foreign persons in a particular issuer, limit the investment by foreign
persons only to a specific class of securities of an issuer that may have less
advantageous rights than the classes available for purchase by domiciliaries of
the countries and/or impose additional taxes on foreign investors. Certain
emerging market issuers may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on foreign capital
remittances. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation of capital, as well
as by the application to the Fund of any restrictions on investments. Investing
in local markets may require the Fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the Fund.
INVESTMENTS IN DEBT SECURITIES
The value of the debt securities held by the Fund, and thus the net asset
value per Share, generally will fluctuate with (i) changes in the perceived
creditworthiness of the issuers of those securities, (ii) movements in interest
rates, and (iii) changes in the relative values of the currencies in which the
Fund's investments are denominated with respect to the US dollar. The extent of
the fluctuation of the Fund's net asset value will depend on various other
factors, such as the average maturity of the Fund's investments, the extent to
which the Fund engages in borrowing and other leveraging transactions, the
extent to which the Fund holds instruments denominated in foreign currencies and
the extent to which the Fund hedges its interest rate, credit and currency
exchange rate risks. Many of the debt obligations in which the Fund will invest
have long maturities. A longer average maturity generally is associated with a
higher level of volatility in the market value of such securities. In addition,
securities issued at a deep discount are subject to greater fluctuations of
market value in response to changes in interest rates than debt obligations of
comparable maturities that do not trade at such a discount. See "Investment
Objectives and Policies--Other Investments--Zero Coupon Securities."
Lower grade debt securities frequently have call or buy-back features which
permit an issuer to call or repurchase the security from the Fund. If an issuer
exercises these provisions in a declining interest rate market, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. The risk of loss due to default by the issuer is
also significantly greater for the holders of lower grade securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. To the extent the Fund is required to seek recovery
upon
41
a default in the payment of principal or interest on its portfolio holdings, the
Fund may incur additional expenses and may have limited legal recourse in the
event of a default. Debt securities issued by governments in emerging markets
can differ from debt obligations issued by private entities in that remedies
from defaults generally must be pursued in the courts of the defaulting
government, and legal recourse is therefore diminished. Although UBS Global AM
attempts to minimize the speculative risks associated with investments in lower
grade securities through diversification, credit analysis and attention to
current trends in interest rates and other factors, investors should carefully
review the investment objectives and policies of the Fund and consider their
ability to assume the investment risks involved before making an investment.
CERTAIN RISKS ASSOCIATED WITH INVESTMENTS IN LOWER-RATED
SECURITIES. Investors should carefully consider their ability to assume the
risks of owning shares of an investment company that invests in lower-rated
income securities before making an investment in the Fund. Most of the
securities in which the Fund invests are below investment grade quality.
Securities rated below investment grade are also known as "junk bonds." There is
a greater possibility that adverse changes in the financial condition of the
issuer, or in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuers of these securities to
make payments of interest and principal. The inability (or perceived inability)
of these issuers to make timely payment of interest and principal would likely
make the values of securities held by the Fund more volatile and could limit the
Fund's ability to sell the securities at prices approximating the values the
Fund had placed on such securities. In the absence of a liquid trading market
for securities held by it, the Fund may at times find it more difficult to
establish the fair market value of such securities.
The Fund may invest in securities that are rated Ca or lower by Moody's, CC
or lower by S&P, comparably rated by another Rating Agency or, if unrated, are
determined to be of equivalent quality by UBS Global AM. Moody's and S&P's
descriptions of securities in the lower rating categories, including their
speculative characteristics, are set forth in the Appendix. Investment in these
securities is extremely speculative and involves significant risk. These
securities frequently do not produce income while they are outstanding and may
require the Fund to bear certain extraordinary expenses in order to protect and
recover its investment. Therefore, to the extent the Fund pursues its secondary
investment objective of capital appreciation through investment in these
securities, the Fund's ability to achieve current income for its Shareholders
may be diminished.
The Fund will also be subject to significant uncertainty as to when, in what
manner and for what value the obligations evidenced by securities of bankrupt
issuers will eventually be satisfied (E.G., through a liquidation of the
obligor's assets, an exchange offer or plan of reorganization involving these
securities or a payment of some amount in satisfaction of the obligation). If
the Fund participates in negotiations with respect to any exchange offer or plan
of reorganization with respect to the issuer of these securities, the Fund may
be restricted from disposing of the securities that it holds until the exchange
offer or reorganization is completed. In addition, even if an exchange offer is
made or plan of reorganization is adopted with respect to the securities held by
the Fund, there can be no assurance that the securities or other assets received
by the Fund in connection with such exchange offer or plan of reorganization
will not have a lower value or income potential than may have been anticipated
when the investment was made. Moreover, any securities received by the Fund upon
completion of an exchange offer or plan of reorganization may be restricted as
to resale.
Securities ratings are based largely on the issuer's historical financial
condition and the Rating Agencies' analysis at the time of rating. Securities
ratings are not a guarantee of quality and may be lowered after the Fund has
acquired the security. Also, Rating Agencies may fail to make timely changes in
credit ratings in response to subsequent events. Consequently, the rating
assigned to any particular security is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. The rating assigned to a security by a Rating Agency
42
does not reflect an assessment of the volatility of the security's market value
or of the liquidity of an investment in the security.
Changes in a Rating Agency's rating of any income security or in the ability
of an issuer to make payments of interest and principal may also affect the
value of these investments. Changes in the value of portfolio securities
generally will not affect cash income derived from such securities, but will
affect the Fund's net asset value. The Fund will not necessarily dispose of a
security when its rating is reduced below the rating at the time of purchase,
although UBS Global AM will monitor all investments to determine whether
continued investment is consistent with the Fund's investment objectives.
Because of the greater number of investment considerations involved in investing
in lower-rated income securities, the achievement of the Fund's investment
objectives will depend more on UBS Global AM'S analytical abilities than would
be the case if it were investing primarily in securities in the higher rating
categories.
The values of lower-rated income securities, like those of other income
securities, generally fluctuate in response to changes in interest rates. Thus,
a decrease in interest rates will generally result in an increase in the value
of such securities. Conversely, during periods of rising interest rates, the
value of such securities will generally decline. These fluctuations can be
expected to be greater for investments in income securities with longer
maturities than for investments in income securities with shorter maturities.
The secondary market prices of lower-rated securities are often affected to a
lesser extent by changes in interest rates and to a greater extent by changes in
general economic conditions and business conditions affecting the issuers of
such securities and their respective industries. Negative publicity or investor
perceptions may also adversely affect the values of lower-rated securities.
In order for the Fund to enforce its rights in the event of a default on
lower-rated securities, the Fund may be required to take possession of and
manage collateral securing the issuer's obligations. This may increase the
Fund's operating expenses and adversely affect the Fund's net asset value. The
Fund may also be limited in its ability to enforce its rights and may incur
greater costs in enforcing its rights in the event an issuer becomes the subject
of bankruptcy proceedings. In addition, the Fund may be required to participate
in a restructuring of the obligation.
Some or all of the securities in which the Fund invests may, when purchased,
be illiquid or may subsequently become illiquid. In many cases, lower-rated
income securities may be purchased in private placements and, accordingly, will
be subject to restrictions on resale as a matter of contract or under the
securities laws. It may be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value. Like
higher-rated income securities, lower-rated income securities generally are
purchased and sold through dealers who make a market in such securities for
their own accounts. However, there are fewer dealers in the lower-rated income
securities market, and that market may be less liquid than the market for
higher-rated income securities, even under normal economic conditions. As a
result, during periods of high demand in the lower-rated securities market, it
may be difficult to acquire lower-rated securities that are appropriate for
investment by the Fund. Adverse economic conditions and investor perceptions
thereof (whether or not based on economic reality) may impair liquidity in the
lower-rated securities market and may cause the prices that the Fund receives
for its lower-rated income securities to be reduced. In addition, the Fund may
experience difficulty in liquidating a portion of its portfolio when necessary
to meet the Fund's liquidity needs or in response to a specific economic event,
such as deterioration in the creditworthiness of the issuers. Under such
conditions, judgment may play a greater role in valuing certain of the Fund's
portfolio instruments than in the case of instruments trading in a more liquid
market.
Although UBS Global AM attempts to minimize the speculative risks associated
with investments in such securities through diversification, credit analysis and
attention to current trends in interest rates
43
and other factors, investors should carefully review the investment objectives
and policies of the Fund and consider their ability to assume the investment
risks involved before making an investment.
ILLIQUID SECURITIES
The Fund may invest without limitation in illiquid securities. To the extent
the Fund invests in illiquid securities, it may not be able readily to dispose
of such securities at prices that approximate those at which it could sell such
securities if they were more widely traded; and, as a result of such
illiquidity, the Fund may have to sell other investments or engage in borrowing
transactions if necessary to raise cash to meet its obligations. The risks
associated with these investments will be accentuated in situations in which the
Fund's operations require cash, such as if the Fund tenders for its Shares or
when it pays dividends or other distributions, and could result in the Fund's
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of these investments. The lack of a liquid secondary market may make it
more difficult for the Fund to assign a value to those securities for purposes
of valuing its portfolio and calculating its net asset value.
NON-DIVERSIFICATION.
The Fund is "non-diversified," as defined in the 1940 Act, but intends to
continue to qualify as a "regulated investment company" for federal income tax
purposes. See "Taxation" in the SAI. This means, in general, that more than 5%
of the Fund's total assets may be invested in securities of an issuer but only
if, at the close of each quarter of the Fund's taxable year, the aggregate
amount of such holdings does not exceed 50% of the value of its total assets and
no more than 25% of the value of its total assets is invested in the securities
of a single issuer. To the extent the Fund's portfolio at times may include the
securities of a smaller number of issuers than if it were "diversified" (as
defined in the 1940 Act), the Fund will at such times be subject to greater risk
with respect to its portfolio securities than an investment company that invests
in a broader range of securities, because changes in the financial condition or
market assessment of a single issuer may cause greater fluctuations in the net
asset value of the Fund's shares.
ANTI-TAKEOVER PROVISIONS.
The Fund's Articles of Incorporation contain provisions limiting (1) the
ability of other entities or persons to acquire control of the Fund, (2) the
Fund's freedom to engage in certain transactions and (3) the ability of the
Fund's directors or Shareholders to amend the Articles of Incorporation. These
provisions of the Articles of Incorporation may be regarded as "Anti-Takeover"
provisions. These provisions could have the effect of depriving the Shareholders
of opportunities to sell their Shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a Shareholder who owns beneficially more than 5% of the Shares. They
provide, however, the advantage of potentially requiring persons seeking control
of the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's management, investment objectives and
policies. See "Capital Stock--Certain Anti-Takeover Provisions of the Articles
of Incorporation."
MARKET DISRUPTION.
As a result of terrorist attacks on the World Trade Center and the Pentagon
on September 11, 2001, some of the US securities markets were closed for a
four-day period. These terrorist attacks and related events led to increased
short-term market volatility. US military and related action in Iraq and
Afghanistan and events in the Middle East could have significant effects on US
and world economies and markets. The Fund does not know how long the securities
markets will continue to be affected by
44
these events and cannot predict the effects of the military action or similar
events in the future on the US economy and securities markets. A similar
disruption of the US or world financial markets could impact interest rates,
secondary trading, ratings, credit risk, inflation and other factors relating to
the Shares.
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Fund is vested
with its Board. The Board approves all significant agreements between the Fund
and persons or companies furnishing services to it, including the Fund's
agreements with its investment advisor and administrator, custodian and transfer
and dividend disbursing agent and registrar. The day-to-day operations of the
Fund have been delegated to its officers and to UBS Global AM, subject to the
Fund's investment objectives and policies and to general supervision by the
Board.
INVESTMENT ADVISOR. Subject to the supervision of the Board, investment
advisory and administration services will be provided to the Fund by UBS Global
AM pursuant to an Investment Advisory and Administration Contract dated as of
September 30, 1993 ("Advisory Contract"). UBS Global AM is the Fund's investment
advisor and administrator. UBS Global AM, a Delaware corporation, is located at
51 West 52nd Street, New York, New York, 10019-6114. UBS Global AM is an
investment advisor registered with the US Securities and Exchange Commission. As
of September 30, 2005, UBS Global AM had approximately $50.2 billion in assets
under management. UBS Global AM is an indirect wholly owned subsidiary of UBS AG
("UBS") and a member of the UBS Global Asset Management Division, which had
approximately $568.9 billion in assets under management worldwide as of
September 30, 2005.
Pursuant to the Advisory Contract, UBS Global AM provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities. UBS Global AM also supervises all
matters relating to the operation of the Fund and obtains for it corporate
officers, clerical staff, office space, equipment and services. As compensation
for its services, UBS Global AM receives from the Fund a fee, computed weekly
and paid monthly, in an amount equal to the following percentages of its average
weekly net assets: the annual rate of 1.25% on assets up to $200 million and
1.00% on assets above $200 million.
The Fund incurs various other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
the shares, taxes and governmental fees, fees and expenses of the directors,
costs of obtaining insurance, expenses of printing and distributing shareholder
material and extraordinary expenses, including costs or losses in any
litigation.
Most of the transactions that the Fund engages in do not involve brokerage.
Where the Fund does engage in brokerage transactions, such transactions may be
conducted through UBS Financial Services Inc. or its affiliates. The Fund pays
fees to UBS Securities LLC for its services as lending agent in the Fund's
portfolio securities lending program. UBS Global AM investment personnel may
engage in securities transactions for their own accounts pursuant to a code of
ethics that establishes procedures for personal investing and restricts certain
transactions.
The Fund may invest in shares of UBS Supplementary Trust--U.S. Cash
Management Prime Fund ("Supplementary Trust"). Supplementary Trust is a business
trust managed by UBS Global Asset Management (Americas) Inc., a related entity
of UBS Global AM.
45
The Fund pays no management fees to Supplementary Trust. Distributions from
Supplementary Trust are reflected as interest income on the statement of
operations included in the Fund's financial statements.
Amounts relating to those investments for the year ended October 31, 2004
are summarized as follows:
SALES INTEREST % OF NET
FUND PURCHASES PROCEEDS INCOME VALUE ASSETS
---- ------------ ------------ -------- ----------- --------
UBS Supplementary
Trust--U.S. Cash
Management Prime Fund........... $168,413,127 $158,294,579 $73,218 $10,118,548 3.17%
PORTFOLIO MANAGEMENT. Uwe Schillhorn is the lead portfolio manager for the
Fund. UBS Global AM's investment professionals are organized into investment
management teams, with a particular team dedicated to a specific asset class.
Mr. Schillhorn has access to certain members of the Emerging Market Debt
investment management team, each of whom is allocated specific responsibilities
for research, security selection, and portfolio construction. The team members
also have access to additional portfolio managers and analysts within the
various asset classes and markets in which the Fund invests. Mr. Schillhorn, as
lead portfolio manager and coordinator for management of the Fund, has
responsibility for allocating the portfolio among the various managers and
analysts, occasionally implementing trades on behalf of analysts on the team and
reviewing the overall composition of the portfolio to ensure its compliance with
its stated investment objectives and strategies. Information about
Mr. Schillhorn is provided below.
Uwe Schillhorn is the Head of Emerging Markets Debt at UBS Global Asset
Management. Mr. Schillhorn has been an Executive Director of UBS Global Asset
Management since 2005, and an employee of the firm since 1997. Mr. Schillhorn
has been the Fund's portfolio manager since 2003.
The SAI provides additional information about the portfolio manager's
compensation, other accounts managed by the portfolio manager and the portfolio
manager's ownership of securities in the Fund.
NET ASSET VALUE
The NAV of the Shares is determined weekly as of the close of regular
trading on the New York Stock Exchange, Inc. ("NYSE") on the last day of the
week on which the NYSE is open for trading. The net asset value of the Shares
also is determined monthly at the close of regular trading on the NYSE on the
last day of the month on which the NYSE is open for trading. The net asset value
per Share is computed by dividing the value of the securities held by the Fund
plus any cash or other assets (including interest and dividends accrued but not
yet received and earned discount) minus all liabilities (including accrued
expenses) by the total number of Shares outstanding at such time.
When market quotations are readily available, the Fund's securities are
valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions are
valued based on such quotations. Market quotations generally are not available
for options traded in the OTC market. When market quotations for options or
futures positions are not readily available, they are valued at fair value as
determined in good faith by or under the direction of the Board. When market
quotations are not readily available for any of the Fund's debt securities, such
securities may be valued based upon appraisals received from independent pricing
sources and broker-dealers. Independent pricing sources may use reported last
sale prices, current
46
market quotations or valuations from computerized "matrix" systems that derive
values based on comparable securities. A matrix system incorporates parameters
such as security quality, maturity and coupon, and/or research and evaluations
by its staff, including review of broker-dealer market price quotations, if
available, in determining the valuation of the portfolio securities.
Notwithstanding the above, debt securities with maturities of 60 days or less
generally are valued at amortized cost if their original term to maturity was 60
days or less, or by amortizing the difference between their fair value as of the
61st day prior to maturity and their maturity value if their original term to
maturity exceeded 60 days, unless in either case the Board or its delegate
determines that this does not represent fair value.
Securities and other instruments that are listed on US and foreign stock
exchanges and for which market quotations are readily available are valued at
the last sale price on the exchange on which the securities are traded, as of
the close of business on the day the securities are being valued or, lacking any
sales on such day, at the last bid price available. In cases where securities or
other instruments are traded on more than one exchange, such securities or other
instruments generally are valued on the exchange designated by UBS Global AM
under the direction of the Board as the primary market. Securities traded in the
OTC market and listed on the NASDAQ normally are valued at the NASDAQ Official
Closing Price; other OTC securities and instruments are valued at the last
available bid price prior to the time of valuation. Other securities and assets
for which reliable market quotations are not readily available (including
restricted securities subject to limitations as to their sale) will be valued at
fair value as determined in good faith by or under the direction of the Board.
All securities and other assets quoted in foreign currency and forward
currency contracts are valued daily in US dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the Fund's custodian. Foreign currency exchange rates may be determined prior to
the close of the NYSE. Occasionally, events affecting the value of foreign
securities and such exchange rates occur between the time at which they are
determined and the close of the NYSE, which events will not be reflected in a
computation of the Fund's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith by or under the direction of the Board. The foreign
currency exchange transactions of the Fund conducted on a spot basis are valued
at the spot rate for purchasing or selling currency prevailing on the foreign
exchange market. Under normal market conditions this rate differs from the
prevailing exchange rate by an amount generally less than one tenth of one
percent due to the costs of converting from one currency to another.
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund's Board adopted a managed distribution policy in December 1999.
Pursuant to the policy as in effect from December 1999 through early May 2005,
the Fund made regular monthly distributions at an annualized rate equal to 11%
of the Fund's net asset value, as determined as of the last trading day during
the first week of that month (usually a Friday, unless the NYSE is closed that
Friday). Effective with the June 2005 monthly distribution, the Board reduced
the annualized rate for distributions from 11% to 9%. The Fund's Board may
change or terminate the managed distribution policy at any time; any such change
or termination may have an adverse effect on the market price for the Fund's
shares.
To the extent that the Fund's taxable income in any fiscal year exceeds the
aggregate amount distributed based on a fixed percentage of its net asset value,
the Fund would make an additional distribution in the amount of that excess near
the end of the fiscal year. To the extent that the aggregate amount distributed
by the Fund (based on a fixed percentage of its net asset value) exceeds
47
its current and accumulated earnings and profits, the amount of that excess
would constitute a return of capital or net realized capital gains for tax
purposes. The Fund made distributions from capital of $0.46 out of $1.61 per
share of total dividends and distributions in 2001, $0.27 out of $1.58 per share
in 2002 and $0.02 out of $1.68 per share in 2003.
Monthly distributions based on a fixed percentage of the Fund's net asset
value may require the Fund to make multiple distributions of long-term capital
gains during a single fiscal year. The Fund has received exemptive relief from
the Securities and Exchange Commission that enables it to do so. The Fund's
Board will reassess the annualized percentage of net assets at which the Fund's
monthly distributions will be made no less frequently than annually.
The first regular monthly distribution to be paid on Shares acquired upon
exercise of Rights will be the first monthly distribution the record date for
which occurs after the issuance of the Shares. The Shares issued in the Offer
would be entitled to the distribution that would be declared to Shareholders in
January, 2006.
DIVIDEND REINVESTMENT PLAN
The Fund has established a Dividend Reinvestment Plan under which all
Shareholders, whose Shares are registered in their own names, or in the name of
UBS Financial Services, Inc. (or its nominee), have all dividends and other
distributions on their Shares automatically reinvested in additional Shares,
unless they elect to receive cash. The Fund currently does not issue any new
Shares in connection with the Dividend Reinvestment Plan. Shareholders may
affirmatively elect to receive all dividends and other distributions in cash
paid by check mailed directly to them by PFPC Inc. ("Transfer Agent"), as
dividend disbursing agent. Shareholders who hold their Shares in the name of a
broker or nominee other than UBS Financial Services Inc. (or its nominee) should
contact such other broker or nominee to determine whether, or how, they may
participate in the Dividend Reinvestment Plan. The ability of such Shareholders
to participate in the Dividend Reinvestment Plan may change if their Shares are
transferred into the name of another broker or nominee.
The Transfer Agent serves as agent for the stockholders in administering the
Dividend Reinvestment Plan. After the Fund declares a dividend or determines to
make another distribution, the Transfer Agent, as agent for the participants,
receives the cash payment and uses it to buy Shares in the open market, on the
NYSE or otherwise, for the participants' accounts. Such Shares may be purchased
at prices that are higher or lower than the net asset value per share of the
Shares at the time of purchase. Shareholders should consider whether continued
participation in the Dividend Reinvestment Plan is appropriate for them when the
Fund's market price exceeds its net asset value; a portion of a dividend may
represent a return of capital, which would be reinvested in the Fund at a
premium to net asset value. The number of shares purchased with each
distribution for a particular Shareholder equals the result obtained by dividing
the amount of the distribution payable to that Shareholder by the average price
per share (including applicable brokerage commissions) that the Transfer Agent
was able to obtain in the open market. The Transfer Agent maintains all
Shareholder accounts in the Dividend Reinvestment Plan and furnishes written
confirmations of all transactions in the accounts, including information needed
by Shareholders for personal and tax records. Shares in the account of each plan
participant are held by the Transfer Agent in non-certified form in the name of
the participant, and each Shareholder's proxy includes those Shares purchased
pursuant to the Dividend Reinvestment Plan.
There is no charge to participants for reinvesting the dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions are paid by the Fund. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Transfer Agent's
open market purchases of Shares in connection with the reinvestment of
distributions.
48
The automatic reinvestment of dividends and other distributions in the
Shares does not relieve participants of any income tax that may be payable on
such distributions. See "Taxation."
All registered holders of the Shares (other than brokers and nominees) are
mailed information regarding the Dividend Reinvestment Plan, including a form
with which they may elect to terminate participation in the Dividend
Reinvestment Plan and receive further dividends and other distributions in cash.
A holder who has elected to participate in the Dividend Reinvestment Plan may
terminate participation in the Dividend Reinvestment Plan at any time without
penalty, and Shareholders who have previously terminated participation in the
Dividend Reinvestment Plan may rejoin it at any time. Changes in elections must
be made in writing to the Transfer Agent and should include the Shareholder's
name and address as they appear on the share certificate or in the Transfer
Agent's records. An election to terminate participation in the Dividend
Reinvestment Plan, until such election is changed, will be deemed to be an
election by a Shareholder to take all subsequent distributions in cash. An
election will be effective only for distributions declared and having a record
date at least ten days after the date on which the election is received.
Experience under the Dividend Reinvestment Plan may indicate that changes
are desirable. Accordingly, the Fund reserves the right to amend or terminate
the Dividend Reinvestment Plan with respect to any dividend or other
distribution if notice of the change is sent to plan participants at least 30
days before the record date for such distribution. The Dividend Reinvestment
Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all plan participants. All correspondence concerning the
Dividend Reinvestment Plan should be directed to the Transfer Agent at P.O. Box
43027, Providence, Rhode Island 02940-3027. For further information regarding
the Dividend Reinvestment Plan, you may also contact the Transfer Agent directly
at 1-800-331 1710.
TAXATION
The following discussion summarizes the principal federal income tax
consequences of the Offer to Shareholders and Exercising Shareholders. See also
"Certain Federal Tax Consequences of the Offer." These discussions are based
upon the Code, US Treasury regulations, Internal Revenue Service rulings and
policies and judicial decisions in effect on the date of this Prospectus. This
discussion does not address all federal income tax aspects of the Offer that may
be relevant to a particular Shareholder because of his or her individual
circumstances or to Shareholders subject to special treatment under the Code
(such as insurance companies, financial institutions, tax-exempt entities,
dealers in securities, foreign corporations, and persons who are not citizens or
residents of the United States), and it does not address any state, local or
foreign tax consequences. Accordingly, each Shareholder should consult his or
her own tax advisor as to the specific tax consequences of the Offer to him or
her.
Investments in the Fund have tax consequences that you should consider. This
section briefly describes some of the more common federal tax consequences. A
more detailed discussion about the tax treatment of distributions from the Fund
and about other potential tax liabilities, including backup withholding for
certain taxpayers and tax aspects of dispositions of Shares of the Fund, is
contained in the SAI. You should consult your tax advisor about your own
particular tax situation.
The Fund intends to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code. For each taxable
year that the Fund so qualifies, the Fund (but not its Shareholders) will be
relieved of federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gain and net gains from certain foreign currency transactions) and net capital
gain that it distributes to its Shareholders.
Dividends from the Fund's investment company taxable income (whether
received in cash or reinvested in additional Shares) are taxable to its
Shareholders as ordinary income to the extent of the
49
Fund's earnings and profits. Distributions of the Fund's net capital gain
(whether received in cash or reinvested in additional Shares) are taxable to its
Shareholders as long-term capital gain, regardless of how long they have held
their Shares. The maximum tax rate applicable to a non-corporate taxpayer's net
capital gain and certain income from qualified dividends is currently generally
15% for gain recognized on capital assets held for more than one year. It is not
anticipated that the Fund will derive any significant amounts, if any, of income
from qualified dividends. For a discussion of the allocation of distributions of
net capital gain between Shareholders, see "Taxation" in the SAI.
A participant in the Dividend Reinvestment Plan will be treated as having
received a distribution in the amount of the cash used to purchase Shares on his
or her behalf, including a pro rata portion of the brokerage fees incurred by
the Transfer Agent. Distributions by the Fund to its Shareholders in any year
that exceed the Fund's earnings and profits generally may be applied by each
Shareholder against his or her basis for the Shares and will be taxable to any
Shareholder only to the extent the distributions to the Shareholder exceed his
or her basis for the Shares.
An investor should be aware that, if Shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full
price for the Shares and receive some portion of the price back as a taxable
distribution. Shareholders who are not liable for tax on their income and whose
Shares are not debt financed are not required to pay tax on dividends or other
distributions they receive from the Fund.
Any distributions that are not from the Fund's investment company taxable
income or net capital gain may be characterized as a return of capital to
Shareholders or, in some cases, as capital gain. Shareholders are required to
reduce the tax basis in their Shares by the amount of any return of capital
distribution. The Fund will notify its Shareholders following the end of each
calendar year of the amounts of dividends and capital gain distributions paid
(or deemed paid) that year. The information regarding capital gain distributions
will designate the portions thereof subject to the different maximum rate of tax
applicable to non-corporate taxpayers' net capital gain as indicated above.
Upon a sale or exchange of Shares (including a sale pursuant to a Share
repurchase or tender offer by the Fund), a Shareholder generally will recognize
a taxable gain or loss equal to the difference between his or her adjusted basis
for the Shares and the amount realized. Any such gain or loss (1) will be
treated as a capital gain or loss if the Shares are capital assets in the
Shareholder's hands and (2) if the Shares have been held for more than one year,
will be long-term capital gain or loss subject to federal income tax at the rate
indicated above, provided that any loss realized on a sale or exchange of Shares
that were held for six months or less will be treated as long-term, rather than
as short term, capital loss to the extent of any capital gain distributions
received thereon. A loss realized on a sale or exchange of Shares will be
disallowed to the extent those Shares are replaced by other Shares within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the Shares (which could occur, for example, as the result of
participation in the Dividend Reinvestment Plan). In that event, the basis of
the replacement Shares will be adjusted to reflect the disallowed loss.
The Fund may acquire zero coupon or other securities issued with OID. As a
holder of such securities, the Fund must include in its gross income the OID
that accrues on the securities during the taxable year, even if it receives no
corresponding payment on them during the year. The Fund also must include in its
gross income each year any "interest" it receives in the form of additional
securities on PIK securities. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non cash income, to satisfy the distribution requirement
imposed on RICs and to avoid imposition of a 4% federal excise tax (see
"Taxation" in the SAI), the Fund may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Fund may
50
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain.
The Fund is required to withhold 28% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other non-corporate Shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund is also required to withhold 28% of all
dividends and capital gain distributions payable to such Shareholders who
otherwise are subject to backup withholding.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its Shareholders. See the SAI
for a further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective Shareholders are
urged to consult their tax advisers.
CAPITAL STOCK
Set forth below is information with respect to the Fund's outstanding
securities as of November 10, 2005.
NUMBER SHARES NUMBER OF
NUMBER OF HELD BY THE FUND SHARES ISSUED
TITLE OF CLASS AND OUTSTANDING SHARES AUTHORIZED FOR ITS ACCOUNT AND OUTSTANDING
------------------------------ ----------------- ---------------- ---------------
100,000,000 0 19,439,667
Common Stock..................................
The Fund is authorized to issue 100 million shares of capital stock, $.001
par value. On November 10, 2005, there were 19,439,667 outstanding Shares of the
Fund. The Shares have no preemptive, conversion, exchange or redemption rights.
Each Share has equal voting, dividend, distribution and liquidation rights. The
outstanding Shares are fully paid and non-assessable. Shareholders are entitled
to one vote per Share. All voting rights for the election of Directors are
non-cumulative, which means that the holders of more than 50% of the Shares can
elect 100% of the Directors then nominated for election if they choose to do so
and, in such event, the holders of the remaining Shares will not be able to
elect any Directors.
Under the rules of the NYSE applicable to listed companies, the Fund
normally will be required to hold an annual meeting of Shareholders in each
fiscal year. If the Fund is converted to an open-end investment company or if
for any other reason the Shares are no longer listed on the NYSE (or any other
national securities exchange the rules of which require annual meetings of
Shareholders), the Fund may decide not to hold annual meetings of Shareholders.
See "Share Repurchases and Tender Offers."
As of the date hereof, the Fund has no intention of offering additional
Shares, except as described herein and potentially under the Dividend
Reinvestment Plan, as it may be amended from time to time. Other offerings of
Shares, if made, will require approval of the Fund's Board and will be subject
to the requirement of the 1940 Act that Shares may not be sold at a price below
the then current NAV, exclusive of underwriting discounts and commissions,
except, among other things, in connection with an offering to existing
Shareholders or with the consent of a majority of the holders of the Fund's
outstanding voting securities.
SHARE REPURCHASES AND TENDER OFFERS
In recognition of the possibility that the Shares might trade at a discount
from NAV and that any such discount may not be in the best interest of
Shareholders, the Fund's Board has determined that it
51
will from time to time consider taking action to attempt to reduce or eliminate
any discount. To that end, the Board may, in consultation with UBS Global AM,
from time to time consider action either to repurchase Shares in the open-market
or to make a tender offer for Shares at their net asset value. The Board has
previously authorized the Fund to repurchase up to 10% of the Fund's outstanding
Shares. In considering such actions, the Board may consider such factors as the
market price of the Shares, the net asset value of the Shares, the liquidity of
the Fund's assets, whether such transactions would impair the Fund's status as a
RIC or result in a failure to comply with applicable asset coverage
requirements, general economic conditions and such other events or conditions
that may have a material effect on the Fund's ability to consummate such
transactions. Under certain circumstances, it is possible that open-market
repurchases or tender offers may constitute distributions under the Internal
Revenue Code to the remaining Shareholders of the Fund. The Board may at any
time, however, decide that the Fund should not repurchase Shares or make a
tender offer. The Fund may borrow to finance repurchases and tender offers.
Interest on such borrowings will reduce the Fund's net income. The Fund has not
repurchased Shares since 2002. See "Additional Information--Stock Repurchases
and Tender Offers" in the SAI.
There is no assurance that the Board will decide to take either of these
actions or that, if undertaken, either Share repurchases or tender offers will
result in the Shares trading at a price that is equal or close to its net asset
value per Share. The market price of the Shares will be determined by, among
other things, the relative demand for and supply of Shares in the market, the
Fund's investment performance, the Fund's dividends and yield and investor
perception of the Fund's overall attractiveness as an investment as compared
with other investment alternatives. Nevertheless, the fact that the Shares may
be the subject of tender offers at net asset value from time to time may reduce
the spread that might otherwise exist between the market price of the Shares and
net asset value per Share. In the opinion of UBS Global AM, sellers may be less
inclined to accept a significant discount if they have a reasonable expectation
of being able to recover net asset value in conjunction with a possible tender
offer. Although the Board believes that Share repurchases and tender offers
generally would have a favorable effect on the market price of the Shares, it
should be recognized that the Fund's acquisition of Shares would decrease the
Fund's total assets and, therefore, have the effect of increasing the Fund's
expense ratio.
Any tender offer made by the Fund for Shares generally would be at a price
equal to the net asset value of the Shares on a date subsequent to the Fund's
receipt of all tenders. Each offer would be made, and the Shareholders would be
notified, in accordance with the requirements of the Securities Exchange Act of
1934, as amended ("Securities Exchange Act") and the 1940 Act, either by
publication or by mailing or both. Each offering document would contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. Each person tendering Shares would pay to the Fund's
Transfer Agent a service charge to help defray certain costs, including the
processing of tender forms, effecting payment, postage and handling. Any such
service charge would be paid directly by the tendering Shareholder and would not
be deducted from the proceeds of the purchase. The Fund's Transfer Agent would
receive the fee as an offset to these costs. The Fund expects that the costs of
effecting a tender offer would exceed the aggregate of all service charges
received from those who tender their Shares. Costs associated with the tender
would be charged against capital.
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Board also may consider from time to time whether it would be in the
best interests of the Fund and its Shareholders to convert the Fund to an
open-end investment company. If the Board determines that such a conversion
would be in the best interests of the Fund and its Shareholders and is
consistent with the 1940 Act, the Board will submit to the Fund's Shareholders,
at the next succeeding annual or special meeting, a proposal to amend the Fund's
Articles of Incorporation to so convert the Fund. Such an amendment would
provide that, upon its adoption by the holders of at least
52
a majority of the Fund's outstanding Shares entitled to vote thereon, the Fund
would convert from a closed-end to an open-end investment company. If the Fund
converted to an open-end investment company, it would be able to continuously
issue and offer Shares for sale, and each such Share could be presented to the
Fund, at the option of the holder thereof, for redemption at a price based on
the then current net asset value per Share. In such event, the Fund could be
required to liquidate portfolio securities to meet requests for redemption, the
Shares would no longer be listed on the NYSE and certain investment policies of
the Fund would require amendment. The Fund would be required to redeem any
outstanding preferred stock and any indebtedness not constituting bank loans.
In considering whether to propose that the Fund convert to an open-end
investment company, the Board would consider various factors, including, without
limitation, the potential benefits and detriments to the Fund and its
Shareholders of conversion, the potential alternatives and the benefits and
detriments associated therewith, and the feasibility of conversion given, among
other things, the Fund's investment objectives and policies. In the event of a
conversion to an open-end investment company, the Fund may charge fees in
connection with the sale or redemption of its Shares.
There can be no assurance that the Board will conclude that such a
conversion is in the best interest of the Fund or its Shareholders. As an
open-end investment company, the Fund may reserve the right to honor any request
for redemption by making payment in whole or in part in securities chosen by the
Fund and valued in the same way as they would be valued for purposes of
computing the Fund's net asset value. If payment is made in securities, a
Shareholder may incur brokerage expenses in converting these securities into
cash.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund presently has provisions in its Articles of Incorporation that have
the effect of limiting (1) the ability of other entities or persons to acquire
control of the Fund, (2) the Fund's freedom to engage in certain transactions
and (3) the ability of the Fund's directors or shareholders to amend the
Articles of Incorporation. These provisions of the Articles of Incorporation may
be regarded as "Anti-Takeover" provisions. Under Maryland law and the Fund's
Articles of Incorporation, the affirmative vote of the holders of at least a
majority of the votes entitled to be cast is required for the consolidation of
the Fund with another corporation, a merger of the Fund with or into another
corporation (except for certain mergers in which the Fund is the successor), a
statutory share exchange in which the Fund is not the successor, a sale or
transfer of all or substantially all of the Fund's assets, the dissolution of
the Fund and any amendment to the Fund's Articles of Incorporation. In addition,
the affirmative vote of the holders of at least 66 2/3% (which is higher than
that required under Maryland law or the 1940 Act) of the outstanding shares of
the Fund's capital stock is required generally to authorize any of the following
transactions or to amend the provisions of the Articles of Incorporation
relating to such transactions:
(1) merger, consolidation or statutory share exchange of the Fund with
or into any other corporation, person, entity or group;
(2) issuance of any securities of the Fund to any corporation, person,
entity or group for cash;
(3) sale, lease or exchange of all or any substantial part of the
assets of the Fund to any corporation, person, entity or group
(except assets having an aggregate market value of less than
$1,000,000); or
(4) sale, lease or exchange to the Fund, in exchange for securities of
the Fund, of any assets of any corporation, person, entity or group
(except assets having an aggregate fair market value of less than
$1,000,000) if such corporation, person, entity or group (within
the meaning of the Securities Exchange Act), is directly, or
indirectly through affiliates, the
53
beneficial owner of more than 5% of the outstanding Shares of the
Fund (a "Principal Shareholder"). A similar vote also would be
required for any amendment of the Articles of Incorporation to
convert the Fund to an open-end investment company by making any
class of the Fund's capital stock a "redeemable security," as that
term is defined in the 1940 Act. Such vote would not be required
with respect to any of the foregoing transactions, however, when,
under certain conditions, the Board approves the transaction,
although in certain cases involving merger, consolidation or
statutory share exchange or sale of all or substantially all of the
Fund's assets or the conversion of the Fund to an open-end
investment company, the affirmative vote of the holders of a
majority of the outstanding shares of the Fund's capital stock
would nevertheless be required. Reference is made to the Articles
of Incorporation of the Fund, on file with the SEC, for the full
text of these provisions.
The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its Shares could have the
effect of depriving the Shareholders of opportunities to sell their Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. See
"Capital Stock--Share Repurchases and Tender Offers." The overall effect of
these provisions is to render more difficult the accomplishment of a merger or
the assumption of control by a Principal Shareholder. They provide, however, the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's management, investment objectives and policies. The
Fund's Board has considered the foregoing Anti-Takeover provisions and concluded
that they are in the best interests of the Fund and its Shareholders.
CUSTODIAN AND TRANSFER AGENT, DIVIDEND
DISBURSING AGENT, REGISTRAR, AND SUBSCRIPTION AGENT
JP Morgan Chase Co., 270 Park Avenue, New York, NY 10017, serves as
custodian of the Fund's assets. JP Morgan Chase Co. employs foreign
subcustodians to provide custody of the Fund's foreign assets. PFPC Inc., whose
principal business address is 60 Moore Road, King of Prussia, PA 19406, is the
Fund's transfer and dividend disbursing agent and registrar.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Fund by
the law firm of Dechert LLP, 1775 I Street, N.W., Washington, DC 20006. Dechert
LLP also acts as counsel to UBS Global AM in connection with other matters.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements of the Fund as of October 31, 2004 are incorporated
by reference in the SAI in reliance on the report of Ernst & Young LLP, the
independent registered public accounting firm of the Fund, given on the
authority of that firm as experts in auditing and accounting. Ernst & Young LLP
is located at 5 Times Square, New York, NY 10036.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semiannual reports and audited annual reports,
including a list of investments held, to shareholders.
54
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act and the 1940 Act and in accordance therewith is required to file
reports, proxy statements and other information with the SEC. Any such reports,
proxy statements and other information filed by the Fund can be inspected and
copied (at prescribed rates) at the public reference facilities of the SEC,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Fund's
Shares are listed on the NYSE. Reports, proxy statements and other information
concerning the Fund can also be inspected and copied at the Library of the NYSE,
20 Broad Street, New York, NY 10005.
This Prospectus constitutes a part of a registration statement on Form N-2
(together with the SAI and all the exhibits and appendices thereto, the
"Registration Statement") filed by the Fund with the SEC under the Securities
Act and the 1940 Act. This Prospectus and the SAI do not contain all of the
information set forth in the Registration Statement. Reference is hereby made to
the Registration Statement and related exhibits for further information with
respect to the Fund and the Shares offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the SEC.
55
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Additional Information About Investment Policies;
Investment Limitations and Restrictions......... 2
Strategic Transactions............................ 5
Organization of the Fund; Directors and Officers;
Principal Holders and Management Ownership of
Securities...................................... 13
Proxy Voting Policies............................. 23
Investment Advisory and Administration
Arrangements.................................... 23
Portfolio Transactions............................ 28
Code of Ethics.................................... 29
Portfolio Turnover................................ 29
Taxation.......................................... 29
Additional Information............................ 34
Financial Information............................. 35
56
APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S RATINGS FOR CORPORATE AND CONVERTIBLE BONDS:
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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in the 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 some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations
(I.E, they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain 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 judge to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default of 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
rating classification from Aa to Caa. The modifier "1" indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
"2" indicates a mid range ranking; and the modifier "3" indicates a ranking in
the lower end of its generic rating category.
A-1
DESCRIPTION OF S&P RATINGS FOR CORPORATE AND CONVERTIBLE DEBT SECURITIES:
AAA--An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation 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 obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation 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 of the obligor 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 on the obligation.
CC--An obligation rated "CC" is currently highly vulnerable to nonpayment.
C--The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation being continued.
D--An 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.
PLUS (+) OR MINUS (-)--The ratings from "AA" to "CCC" may be modified by the
addition of plus or minus sign to show relative standing within the major rating
categories.
R--This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
THE FUND'S INVESTMENT ADVISOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY SUCH
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME AFTER THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THE PROSPECTUS
WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
TABLE OF CONTENTS
PAGE
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Prospectus Summary................................ 1
Fund Expenses..................................... 14
Financial Highlights.............................. 15
The Offer......................................... 16
Use of Proceeds................................... 26
The Fund.......................................... 26
Description of Capital Stock...................... 26
Investment Objectives and Policies................ 27
Other Investment Practices........................ 33
Special Considerations and Risk Factors........... 37
Management of the Fund............................ 45
Net Asset Value................................... 46
Dividends and Other Distributions; Dividend
Reinvestment Plan............................... 47
Taxation.......................................... 49
Capital Stock..................................... 51
Custodian and Transfer Agent, Dividend Disbursing
Agent, Registrar, and Subscription Agent........ 54
Legal Matters..................................... 54
Independent Registered Public Accounting Firm..... 54
Reports to Shareholders........................... 54
Additional Information............................ 55
Table of Contents of Statement of Additional
Information..................................... 56
Appendix--Description of Bond Ratings............. A-1