As filed with the Securities and Exchange Commission on October 28, 2005
1933 Act Registration No. 333-127896
1940 Act Registration No. 811-7540
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
Post-Effective Amendment No. __
/ / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9
GLOBAL HIGH INCOME DOLLAR FUND INC.
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 882-5000
MARK F. KEMPER, ESQ.
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, New York 10019-6114
(Name and address of agent for service)
Copies to:
JACK W. MURPHY, ESQ.
Dechert LLP
1775 I Street, N.W.
Washington, D.C. 20006-2401
Telephone: (202) 261-3300
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT OFFERING AGGREGATE REGISTRATION
BEING REGISTERED BEING REGISTERED PRICE PER UNIT OFFERING PRICE FEE
-----------------------------------------------------------------------------------------------
Common Stock 8,137,361 $16.58 $134,917,445(1) $16,559.80
($.001 par value)
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933 based on the
average high and low prices of Global High Income Dollar Fund Inc.
reported on the New York Stock Exchange on October 24, 2005.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the SEC, acting pursuant to said Section 8(a), may
determine.
GLOBAL HIGH INCOME DOLLAR FUND INC.
CROSS REFERENCE SHEET
PART A--PROSPECTUS
ITEMS IN PART A OF FORM N-2 LOCATION IN PROSPECTUS
----------------------------------------------------------------------------------------------------------------------
Item 1. Outside Front Cover Front Cover Page
Item 2. Cover Pages; Other Offering Information Inside Front and Outside Back Cover Page
Item 3. Fee Table and Synopsis Fund Expenses and Prospectus Summary
Item 4. Financial Highlights Financial Highlights
Item 5. Plan of Distribution Front Cover Page; Prospectus Summary; The Offer
Item 6. Selling Shareholders N/A
Item 7. Use of Proceeds Use of Proceeds
Item 8. General Description of the Registrant The Fund; Investment Objectives and Policies;
Special Considerations and Risk Factors
Item 9. Management Management of the Fund
Item 10. Capital Stock Description of Capital Stock
Item 11. Defaults and Arrears on Senior Securities N/A
Item 12. Legal Proceedings N/A
Item 13. Table of Contents of the Statement of Table of Contents of the Statement of Additional
Additional Information Information
PART B--STATEMENT OF ADDITIONAL INFORMATION LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
----------------------------------------------------------------------------------------------------------------------
Item 14. Cover Page Cover Page of SAI
Item 15. Table of Contents Cover Page of SAI
Item 16. General Information and History N/A
Item 17. Investment Objectives and Policies Additional Information About Investment Policies;
Investment Limitations and Restrictions
Item 18. Management Organization of the Fund; Directors and Officers;
Principal Holders and Management Ownership of
Securities
Item 19. Control Persons and Principal Holders of Organization of the Fund; Directors and Officers;
Securities Principal Holders and Management Ownership of
Securities
Item 20. Investment Advisory and Other Services Investment Advisory and Administration Agreements
Item 21. Portfolio Managers Investment Advisory and Administration Agreements
Item 22. Brokerage Allocation and Other Practices Portfolio Transactions
Item 23. Tax Status Taxation
Item 24. Financial Statements Financial Information
Part C--Other Information
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Item 25-33 Part C
The information contained in this Prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
Prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED OCTOBER 27, 2005
GLOBAL HIGH INCOME DOLLAR FUND INC.
6,509,889 SHARES
ISSUEABLE UPON EXERCISE OF NON-TRANSFERABLE RIGHTS TO
SUBSCRIBE FOR SUCH SHARES
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 (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.
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.
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 ____,
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 __ 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. toll-free at
800-780-7438 or from the SEC's website at http://www.sec.gov.
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, BEFORE ESTIMATED SUBSCRIPTION
ESTIMATED SALES LOAD EXPENSES, TO THE FUND(2) PRICE(1)
Per Share $ 0 $ [_] $ _
Total Maximum(3) $ 0 $ [_] $ _
----------
(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. 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 $____ and the total maximum Estimated
Proceeds, before expenses, to the Fund will be approximately $____.
No sales load will be charged by the Fund in connection with this
Offer. However, Shareholders that choose to exercise their Rights
through broker-dealers, banks and nominees may incur a servicing fee
charged by such broker-dealer, bank or nominee.
(2) Before deduction of expenses related to the Offer incurred by the Fund,
estimated at approximately [$_____.]
(3) Assumes all Rights are exercised at the estimated Subscription Price.
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 $____, respectively, and the last reported
sales price of a Share on the NYSE on those dates was $17.55 and $____,
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.
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 (i) the 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 The Fund may, at its discretion, issue up to an additional
PRIVILEGE 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
1
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 whom
it is the holder of record only if the Nominee provides to
the Fund, on or before the close of business on
December 15, 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.
2
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 The Fund will suspend the Offer until it amends this
DECLINE OR INCREASE 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 Contact your broker, bank or trust company.
SUBSCRIPTION
INFORMATION - Contact The Altman Group, Inc. (the "Information
Agent") toll-free at 800-780 7438.
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."
3
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.
4
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 _____ 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 $____
and the Fund's last reported share price of a Share on the
NYSE was $____. 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 the Shares. The Shares issued in the
Offer would be entitled to the distribution that would be
declared to Shareholders in January 2006. See
5
"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 The Fund's primary objective is to achieve a high level of
OBJECTIVES AND current income. As a secondary objective, the Fund seeks
POLICIES 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
6
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.
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 32. 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. Some Sovereign Debt
instruments in which the Fund invests are likely to be
acquired at a discount.
7
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 June 30, 2005, UBS Global AM
had approximately $50.1 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
$535.3 billion in assets under management worldwide as of
June 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 an 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 offer because it
may also marginally reduce the total expense ratio, even
for non-participating shareholders.
SHARE REPURCHASES In recognition of the possibility that the Shares could
AND TENDER OFFERS; trade at a discount from NAV and that any such discount
CONVERSION TO OPEN- 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
8
END FUND 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- Shareholders who do not fully exercise their Rights will
PARTICIPATION IN THE experience dilution of their proportionate ownership
OFFER interest in the Fund and dilution of voting power.
POSSIBLE YIELD It is possible that the Offer could result in dilution of
DILUTION 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 in the market price of Shares may increase
VOLATILITY 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, secondarily, capital appreciation. An
investment in the Fund may
9
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 Investments in emerging market securities involve certain
WITH INVESTMENTS IN considerations not typically associated with investing in
EMERGING MARKET securities of US companies, including (i) currency
SECURITIES 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 Investments in Sovereign Debt involve special risks.
WITH INVESTMENTS IN Foreign governmental issuers of debt or the governmental
SOVEREIGN DEBT 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
10
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. 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 The value of the debt securities held by the Fund, and
WITH INVESTMENTS IN thus the net asset value per share of the Shares,
DEBT SECURITIES 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.
11
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 were not issued
at a deep discount.
RISKS ASSOCIATED A substantial portion of the Fund's assets may be invested
WITH LOWER RATED in debt securities, including Sovereign Debt, that are
SECURITIES 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
12
securities were more widely traded. Although UBS Global AM
attempts to minimize the speculative risks associated with
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 Although the Shares have traded at a premium to their NAV
NET ASSET VALUE OF for ____ out of ____ weeks since ____, shares of
SHARES 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 The Fund's Articles of Incorporation contain provisions
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
13
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 "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."
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 1.20%
Other Expenses (1) 0.14%
Total Annual Expenses (2) 1.34%
(1) Other expenses have been estimated for the current fiscal year.
(2) The _____ expense ratio assumes that the offer is fully subscribed,
yielding estimated net proceeds of $___________ (assuming a Subscription
Price of $________ per Share) and that, as a result, based on the Fund's
net asset attributable to Shareholders on __________ __, 2005 of
$_________, the net assets attributable to Shareholders would be
$__________. If the subscription rate of the Offer is less than 50%,
"Other Expenses" would be .16% (a difference of 2 basis points).
Accordingly, "Total Annual Expenses" would be 1.36% (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.
14
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
$ 14 $ 42 $ 73 $ 161
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.
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.
15
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
16
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.
17
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 =
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 20, 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."
18
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."
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
19
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 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.
20
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 $107,550,000 to the net assets of the Fund.
This amount, assuming no fluctuation due to changes in the market, would add
$1,075,500 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 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
21
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
THE SUBSCRIPTION PRICE
The Subscription Price per Share will be the greater of (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 $_____, respectively, and the last
reported share price of a Share on the NYSE on those dates was $17.55 and
$_____, respectively. Since the Offer expires before the actual Subscription
Price is determined, Shareholders who decide to
22
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 brokerage Shareholders whose Shares are
(Notice of Guaranteed Delivery) held in a 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.
23
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
24
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 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 $____ 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 FUND COMPANY TO DELIVER NOTICE OF
GUARANTEED DELIVERY TO THE SUBSCRIPTION AGENT BY THE EXPIRATION DATE:
25
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, (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
26
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.
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
27
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 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
28
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 ___% 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 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 $_____ per share (the "Estimated Subscription Price"), the
net proceeds of the Offer will be
29
approximately $_________________, after deducting expenses payable by the
Fund estimated at approximately $___________. 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 the date of this Prospectus) 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 _______________ Shares of common stock issued and
outstanding. As of November 10, 2005, the Fund's total assets were
$____________________.
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 __________ Shares outstanding as of the Record Date.
Assuming that all Rights are exercised an additional ______________ 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 number of Shares traded. The NAV as of the close of business on
November 10, 2005 was $____ and the last reported sales price of a Share that
day was $_____, representing a ___% premium to NAV.
30
MARKET MARKET
PRICE CORRESPONDING PREMIUM/ PRICE CORRESPONDING PREMIUM/
QUARTER HIGH NET ASSET (DISCOUNT) LOW NET ASSET (DISCOUNT) TRADING
ENDING (1) VALUE(2) (2) (1) VALUE (2) (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 17.08 15.59 9.54 2,927,800
April 30, 2005 19.48 15.86 22.82 16.44 15.39 6.85 1,675,300
July 31, 2005 17.48 15.15 15.37 15.85 15.28 3.74 1,504,600
----------
(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.
31
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 Lithuania
Argentina Latvia
Bolivia Malaysia
Botswana Mexico
Brazil Morocco
Bulgaria Nigeria
Chile Oman
China Pakistan
Columbia Panama
Costa Rica Peru
Croatia Philippines
Czech Republic Poland
Dominican Republic Portugal
Ecuador Romania
Estonia Russia
Ghana Slovakia
Greece Slovenia
Hungary Singapore
India South Africa
Indonesia Thailand
Israel Trinidad & Tobago
Ivory Coast Turkey
Jamaica Uruguay
Jordan Ukraine
Kazakhstan Venezuela
Kenya Zambia
Korea Zimbabwe
Lebanon
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
32
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.
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.
33
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.
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
34
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 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
35
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 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
36
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.
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
37
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 in accordance with
guidelines established by the Fund's Board.
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
38
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 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
39
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.
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
40
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."
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
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.
41
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 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 ___ out of ___ weeks since November 10, 2005, 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
_______________. 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
42
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 ____ weeks and the longest consecutive
period during which Shares of the Fund traded at a premium to NAV was
approximately _____ weeks. The Fund cannot predict whether the Shares will
trade in the future at, above or below NAV.
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
43
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.
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
44
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.
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.
45
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 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
46
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 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.
47
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
48
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 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
49
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 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
50
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 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 June 30, 2005, UBS Global AM
had approximately $50.1 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 $535.3 billion in
assets under management worldwide as of June 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
51
Fund and obtain 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
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 materials, organizational expenses 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 the 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.
The Fund pays no management fees to Supplementary Trust. Distributions
from the 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
FUND PURCHASES PROCEEDS INCOME VALUE NET 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.
52
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 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 are generally determined
prior to the close of the NYSE. Occasionally, events affecting the value of
53
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 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
54
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.
55
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.
56
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 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.
57
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 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
58
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
TITLE OF CLASS AND NUMBER OF SHARES HELD AUTHORIZED FOR ITS
OUTSTANDING BY THE FUND ACCOUNT NUMBER OF SHARES ISSUED
------------------ --------------------- ------------------ -----------------------
Common Stock
The Fund is authorized to issue 100 million shares of capital stock,
$.001 par value. On November 10, 2005, there were ___________ 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
59
determined that it 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 undertaken a
tender offer 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.
60
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 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
61
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 or entity 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
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.
62
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.
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.
63
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Additional Information About Investment Policies; Investment Limitations and Restrictions 1
Strategic Transactions 6
Organization of the Fund; Directors and Officers; Principal Holders and Management Ownership of
Securities 16
Proxy Voting Policies 26
Investment Advisory and Administration Arrangements 27
Portfolio Transactions 28
Code of Ethics 29
Portfolio Turnover 30
Taxation 30
Additional Information 36
Financial Information 37
64
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.
65
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.
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.
66
D--An obligation rated "D" is in payment default. The I'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.
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.
67
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY 1
FUND EXPENSES 14
FINANCIAL HIGHLIGHTS 15
THE OFFER 18
USE OF PROCEEDS 29
THE FUND 30
DESCRIPTION OF CAPITAL STOCK 30
INVESTMENT OBJECTIVES AND POLICIES 31
OTHER INVESTMENT PRACTICES 37
SPECIAL CONSIDERATIONS AND RISK FACTORS 42
MANAGEMENT OF THE FUND 51
NET ASSET VALUE 53
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN 54
TAXATION 57
CAPITAL STOCK 59
CUSTODIAN AND TRANSFER AGENT, DIVIDEND DISBURSING AGENT, REGISTRAR, AND SUBSCRIPTION AGENT 63
LEGAL MATTERS 63
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 63
REPORTS TO SHAREHOLDERS 63
ADDITIONAL INFORMATION 63
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION 64
APPENDIX - DESCRIPTION OF BOND RATINGS 65
i
The information contained herein is not complete and may be changed.
We may not sell these securities until the registration statement
filed with the securities and exchange commission is effective. This
statement of additional information is not an offer to sell these securities
and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 26, 2005
GLOBAL HIGH INCOME DOLLAR FUND INC.
51 West 52nd Street
New York, New York 10019
Global High Income Dollar Fund Inc. (the "Fund") is a non-diversified,
closed-end management investment company. 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. No assurance can be given that the Fund will be able to achieve its
investment objectives.
This Statement of Additional Information ("SAI") is not a prospectus
and should be read only in conjunction with the prospectus for the Fund, dated
___________, 2005 ("Prospectus"). Capitalized terms not otherwise defined herein
have the same meanings as in the Prospectus. A copy of the Prospectus may be
obtained without charge by writing the Fund or by calling The Altman Group,
Inc. toll-free at 800-780-7438. The Prospectus is also available on the
website of the Securities and Exchange Commission ("SEC")
(http://www.sec.gov). The Prospectus also contains more complete information
about the Fund. You should read it carefully before investing.
Portions of the Fund's Annual and Semi-Annual Reports to Shareholders
are incorporated by reference into this SAI. The Annual and Semi-Annual Reports
accompany this SAI. You may obtain an additional copy of the Annual Report or
the Semi-Annual Report to Shareholders without charge by calling toll-free
800-647 1568.
The Prospectus and this SAI omit certain of the information contained
in the registration statement relating to these securities filed with the SEC.
These items may be inspected and copied at the SEC's public reference room in
Washington, DC and are available on the SEC's website.
TABLE OF CONTENTS
PAGE
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES AND RESTRICTIONS 1
STRATEGIC TRANSACTIONS 6
ORGANIZATION OF THE FUND; DIRECTORS AND OFFICERS; PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES 16
PROXY VOTING POLICIES 26
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT 27
PORTFOLIO TRANSACTIONS 28
CODE OF ETHICS 29
PORTFOLIO TURNOVER 30
TAXATION 30
ADDITIONAL INFORMATION 36
FINANCIAL INFORMATION 37
i
ADDITIONAL INFORMATION ABOUT
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
LEVERAGE AND BORROWING
The Fund is authorized to borrow money for investment purposes, to pay
dividends or to fund repurchases of its Shares in an amount up to 33 1/3% of its
total assets (including the amount of the borrowing and any other indebtedness
representing "senior securities" under the 1940 Act but reduced by any
liabilities other than senior securities). The Fund also is authorized to borrow
up to an additional 5% of its total assets (not including the amount borrowed)
without regard to the foregoing limitation for temporary or emergency purposes
(such as clearance of portfolio transactions, the payment of dividends and share
repurchases). Borrowing constitutes leverage, a speculative technique. The Fund
will only use leverage when UBS Global AM believes that such leverage will
benefit the Fund after taking leverage risks into consideration.
The net asset value of the Fund and the yield on its portfolio may be
more volatile due to its use of leverage, which may, in turn, result in
increased volatility of the market price of the Fund's Shares. Leverage also
creates interest expenses for the Fund, which will reduce the net income from
its portfolio securities. To the extent the income derived from securities
purchased with funds obtained through leverage exceeds the interest and other
expenses that the Fund will have to pay in connection with such leverage, the
Fund's net income will be greater than if leverage were not used. Conversely, if
the income from the assets obtained through leverage is not sufficient to cover
the cost of leverage, the net income of the Fund will be less than if leverage
were not used, and therefore the amount available for distribution to
stockholders will be reduced. The Fund expects that most of its leverage would
be in the form of bank borrowings and reverse repurchase agreements if it
were to employ leverage.
BRADY BONDS
The Fund may invest in Brady Bonds and other Sovereign Debt of
countries that have restructured or are in the process of restructuring
Sovereign Debt pursuant to the Brady Plan. "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.
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund ("IMF").
The Brady Plan framework, as it has developed, contemplates the exchange of
commercial bank debt for newly issued Brady Bonds. Brady Bonds may also be
issued in respect of new money being advanced by existing lenders in connection
with the debt restructuring. The World Bank and/or the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank
1
debt at a discount. The Fund normally purchases Brady Bonds in secondary
markets, as described below, in which the price and yield to the investor
reflect market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal
due at maturity by US Treasury zero coupon bonds with a maturity equal to the
final maturity of such Brady Bonds. Collateral purchases are financed by the
IMF, the World Bank and the debtor nations' reserves. In the event of a default
with respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the US Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal, if any, at final maturity, (ii) the
collateralized interest payments, if any, (iii) the uncollateralized interest
payments, and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds generally are purchased and sold
in secondary markets through US securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories. Many of the Brady Bonds and other Sovereign Debt in
which the Fund invests are likely to be acquired at a discount.
CONVERTIBLE SECURITIES
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A convertible
2
security generally will sell at a premium over its conversion value by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
A convertible security might be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Any of these
actions could have an adverse effect on the Fund's ability to achieve its
investment objectives.
CORPORATE DEBT INSTRUMENTS
Corporate bonds are debt instruments issued by corporations. As
creditors, bondholders have a prior legal claim over common and preferred
stockholders of the corporation as to both income and assets for the principal
and interest due to the bondholder. The Fund may purchase corporate bonds
subject to quality constraints. Investing in corporate debt instruments subjects
the Fund to interest rate risk and credit risk.
ILLIQUID SECURITIES
Illiquid securities may, but do not necessarily, include certain
restricted securities. To facilitate the increased size and liquidity of the
institutional markets for unregistered securities, the Securities and Exchange
Commission ("SEC") has adopted Rule 144A under the Securities Act of 1933 ("1933
Act"). Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. Institutional markets for restricted securities have developed as a
result of Rule 144A, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment. Such markets include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities, and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The Fund may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by the Fund.
The assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
The Board of Directors has delegated the function of making day-to-day
determinations of liquidity to UBS Global AM pursuant to guidelines approved by
the Board. UBS Global AM will take into account a number of factors in reaching
liquidity decisions, including but not limited to (1) the frequency of trades
for the security, (2) the number of dealers
3
that make quotes for the security, (3) the number of dealers that have
undertaken to make a market in the security, (4) the number of other potential
purchasers for the security and (5) the nature of the security and how trading
is effected (e.g., the time needed to sell the security, how bids are solicited
and the mechanics of transfer). UBS Global AM will monitor the liquidity of
restricted securities in the Fund's portfolio.
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 becomes
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.
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the Fund, or (b) 67% or more of such
shares present at a stockholders' meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations or of any of the Fund's investment
policies. Under the Fund's fundamental investment limitations, the Fund may not:
(1) purchase any security if, as a result of that purchase, 25%
or more of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same industry,
except that this limitation does not apply to
4
securities issued or guaranteed by the US government, its agencies or
instrumentalities or to municipal securities.
The following interpretations apply to, but are not a part of, this
fundamental limitation: With respect to this limitation, (a) US banking
(including US finance subsidiaries of non-US banks) and non-US banking will be
considered to be different industries, and (b) asset-backed securities will be
grouped in industries based upon their underlying assets and not treated as
constituting a single, separate industry.
(2) issue senior securities or borrow money, except as permitted
under the 1940 Act and then not in excess of 33 1/3% of the Fund's total
assets (including the amount of the senior securities issued but reduced by
any liabilities not constituting senior securities) at the time of the
issuance or borrowing, except that the fund may borrow up to an additional
5% of its total assets (not including the amount borrowed) for temporary or
emergency purposes.
(3) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt securities or
instruments, or participations or other interests therein and investments
in government obligations, commercial paper, certificates of deposit,
bankers' acceptances or similar instruments will not be considered the
making of a loan.
The following interpretation applies to, but is not a part of, this
fundamental restriction: The Fund's investments in master notes and similar
instruments will not be considered to be the making of a loan.
(4) engage in the business of underwriting securities of other
issuers, except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with its
disposition of portfolio securities.
(5) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation,
and except that the Fund may exercise rights under agreements relating to
such securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real
estate can be liquidated in an orderly manner.
(6) purchase or sell physical commodities unless acquired as a
result of owning securities or other instruments, but the Fund may
purchase, sell or enter into financial options and futures, forward and
spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
not fundamental and may be changed by the Fund's Board of Directors without
shareholder approval.
The Fund will not:
(1) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except
that the Fund may make margin deposits in connection with its
use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
5
(2) engage in short sales of securities or maintain a short
position, except that the Fund may (a) sell short "against
the box" and (b) maintain short positions in connection with
its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial
contracts or derivative instruments.
STRATEGIC TRANSACTIONS
As discussed in the Prospectus, UBS Global AM may use a variety of
financial instruments ("Hedging Instruments"), including options, futures
contracts (sometimes referred to as "futures"), options on futures contracts,
forward currency contracts and interest rate protection transactions, to attempt
to hedge the Fund's portfolio. The Fund also may use options and forward
currency contracts to attempt to enhance income and realize gains, and use
foreign currency futures contracts and options on futures contracts for such
other purposes to the extent permitted by the Commodity Futures Trading
Commission ("CFTC").
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in the Fund's portfolio. Thus, in a short hedge the Fund
takes a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security prior to purchase. If the price of the security increased
above the exercise price of the call, the Fund could exercise the call and thus
limit its acquisition to the exercise price plus the premium paid and
transaction costs. Alternatively, the Fund might be able to offset the price
increase by closing out an appreciated call option and realizing a gain.
The Fund may purchase and write (sell) covered straddles on securities
or indices of debt securities. A long straddle is a combination of a call and a
put option purchased on the same security or on the same futures contract, where
the exercise price of the put is less than or equal to the exercise price of the
call. The Fund would enter into a long straddle when UBS Global AM believes that
it is likely that interest rates will be more volatile during the term of the
option than the option pricing implies. A short straddle is a combination of a
call and a put written on the same security where the exercise price of the put
is less than or equal to the exercise price of the call. The Fund would enter
into a short straddle when UBS Global AM
6
believes that it is unlikely that interest rates will be as volatile during the
term of the options as the option pricing implies.
Hedging Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the Fund
owns or intends to acquire. Hedging Instruments on debt securities may be used
to hedge either individual securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the CFTC. In addition, the Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxation."
In addition to the products, strategies and risks described below and
in the Prospectus, UBS Global AM expects additional opportunities to develop in
connection with options, futures contracts, forward currency contracts and other
hedging techniques. These new opportunities may become available as the
financial marketplace develops new techniques, as regulatory authorities broaden
the range of permitted transactions and as new options, futures contracts,
forward currency contracts or other techniques are developed. UBS Global AM may
utilize these opportunities to the extent that they are consistent with the
Fund's investment objectives and permitted by the Fund's investment limitations
and applicable regulatory authorities.
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special considerations and
risks, as described below. Risks pertaining to particular Hedging Instruments
are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon UBS Global
AM's ability to predict movements of the overall securities, currencies and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. While UBS Global AM is experienced in
the use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Hedging Instrument and price movements of the
investments being hedged. For example, if the value of a Hedging Instrument used
in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Hedging
Instruments are traded. The effectiveness of hedges using Hedging Instruments on
indices will depend on the degree of correlation between price movements in the
index and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect
7
of favorable price movements in the hedged investments. For example, if the Fund
entered into a short hedge because UBS Global AM projected a decline in the
price of a security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Hedging Instrument. Moreover, if the
price of the Hedging Instrument declined by more than the increase in the price
of the security, the Fund could suffer a loss. In either such case, the Fund
would have been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts to make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of the other party to the transaction ("contra party") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Fund.
COVER FOR HEDGING STRATEGIES
Transactions using Hedging Instruments, other than purchased options,
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies or other options, futures contracts or
forward currency contracts or (2) cash and liquid securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. The Fund will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Hedging Instrument is open, unless they
are replaced with similar assets. As a result, the commitment of a large portion
of the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet current obligations.
OPTIONS
The Fund may purchase put and call options, and write (sell) covered
put and call options, on debt securities, on indices of debt securities, futures
contracts and foreign currencies. The purchase of call options serves as a long
hedge, and the purchase of put options serves as a short hedge. Writing covered
put or call options can enable the Fund to enhance income by reason of the
premiums paid by the purchasers of such options. However, if the market price of
the security underlying a put option the Fund has written declines to less than
the exercise price of the option, minus the premium received, the Fund would
expect to suffer a loss. Writing
8
covered call options serves as a limited short hedge, because declines in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the Fund will be obligated to sell the security at
less than its market value. All or a portion of the assets used as cover for OTC
options written by the Fund would be considered illiquid. The value of an option
position will reflect, among other things, the current market value of the
underlying investment, the time remaining until expiration, the relationship of
the exercise price to the market price of the underlying investment, the
historical price volatility of the underlying investment and general market
conditions. Options normally have expiration dates of up to nine months. Options
that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call option that it had written by purchasing
an identical call option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction.
Generally, the OTC debt and foreign currency options used by the Fund
are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Fund's ability to establish the close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the contra
9
party, the Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
The Fund may purchase and write put and call options on indices of
debt securities in much the same manner as the more traditional options
discussed above, except that index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
FUTURES
The Fund may purchase and sell interest rate futures contracts, bond
index futures contracts and foreign currency futures contracts. The Fund may
also purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities or
indices. Similarly, writing covered put options on futures contracts can serve
as a limited long hedge.
Futures strategies also can be used to manage the average duration of
the Fund's portfolio. If UBS Global AM wishes to shorten the average duration of
the Fund's portfolio, the Fund may sell an interest rate futures contract or a
call option thereon, or purchase a put option on that futures contract. If UBS
Global AM wishes to lengthen the average duration of the Fund's portfolio, the
Fund may buy an interest rate futures contract or a call option thereon, or sell
a put option thereon.
The Fund may also write put options on interest rate futures contracts
while at the same time purchasing call options on the same futures contracts in
order synthetically to create a long futures contract position. Such options
would have the same strike prices and expiration dates. The Fund will engage in
this strategy only when it is more advantageous to the Fund than is purchasing
the futures contract.
No price is paid upon entering into a futures contract. Instead, at
the inception of a futures contract the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, "initial margin" consisting of cash or
obligations of the United States or obligations that are fully guaranteed as to
principal and interest by the United States, in an amount generally equal to 10%
or less of the contract value. Margin must also be deposited when writing an
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures contracts
does not represent a borrowing, but rather is in the nature of a performance
bond or good-faith deposit that is returned to the Fund at the termination of
the transaction if all
10
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures or written option position
varies, a process known as "marking to market." Variation margin does not
involve borrowing, but rather represents a daily settlement of the Fund's
obligations with respect to an open futures or options position. When the Fund
purchases an option on a future, the premium paid plus transaction costs is all
that is at risk. In contrast, when the Fund purchases or sells a futures
contract or writes an option thereon, it is subject to daily variation calls
that could be substantial in the event of adverse price movements. If the Fund
has insufficient cash to meet daily variation margin requirements, it might need
to sell securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or options position due
to the absence of a liquid secondary market or the imposition of price limits,
it could incur substantial losses. The Fund would continue to be subject to
market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or liquid securities in a
segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options might not correlate
perfectly with movements in the prices of the investments being hedged. For
example, all participants in the futures and options markets are subject to
daily variation margin calls and might be compelled to liquidate futures or
options positions whose prices are moving unfavorably to avoid being subject to
further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets, there might be increased participation by speculators in
the futures markets. This participation also might cause temporary price
distortions. In addition, activities of large traders in both the futures and
securities markets
11
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
ADVISOR EXEMPTION.
Pursuant to claims for exemption filed with the CFTC and/or the
National Futures Association, UBS Global AM is not deemed to be a "commodity
pool operator" under the Commodity Exchange Act, and is not subject to
registration or regulation as such under the Commodity Exchange Act.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS
The Fund may use options and futures on foreign currencies, as
described above, and foreign currency forward contracts, as described below, to
hedge against movements in the values of the foreign currencies in which the
Fund's securities are denominated. Such currency hedges can protect against
price movements in a security that the Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no Hedging Instruments on that currency are available
or such Hedging Instruments are more expensive than certain other Hedging
Instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using Hedging Instruments on other
currencies, the values of which UBS Global AM believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Hedging Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of Hedging Instruments on foreign currencies depends on the
value of the underlying currency relative to the US dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the US options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, the Fund might be
12
required to accept or make delivery of the underlying foreign currency in
accordance with any US or foreign regulations regarding the maintenance of
foreign banking arrangements by US residents and might be required to pay any
fees, taxes and charges associated with such delivery assessed in the issuing
country.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of US dollars or another foreign
currency. Such transactions may serve as long hedges--for example, the Fund may
purchase a forward currency contract to lock in the US dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges--for
example, the Fund may sell a forward currency contract to lock in the US
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
As noted above, the Fund may seek to hedge against changes in the
value of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which UBS Global AM believes
will have a positive correlation to the values of the currency being hedged. In
addition, the Fund may use forward currency contracts to shift exposure to
foreign currency fluctuations from one country to another. For example, if the
Fund owned securities denominated in a foreign currency and UBS Global AM
believes that currency would decline relative to another currency, it might
enter into a forward contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency. Transactions
that use two foreign currencies are sometimes referred to as "cross hedging."
Use of a different foreign currency magnifies the risk that movements in the
price of hedging instruments will not correlate or will correlate unfavorably
with the foreign currency being hedged.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the contra party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position
13
in securities denominated in the foreign currency or to maintain cash or liquid
securities in a segregated account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change after
the foreign currency contract has been established. Thus, the Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward currency contracts. The projection
of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts or maintain a net
exposure to such contracts only if (1) the consummation of the contracts would
not obligate the Fund to deliver an amount of foreign currency in excess of the
value of the position being hedged by such contracts or (2) the Fund maintains
cash or liquid securities in a segregated account in an amount not less than the
value of its total assets committed to the consummation of the contract and not
covered as provided in (1) above, as marked to market daily.
The Fund may use the following Hedging Instruments:
OPTIONS ON DEBT SECURITIES AND CURRENCIES--A call option is a contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security or currency underlying the option at a specified price
at any time during the term, or upon the expiration, of the option. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option, to deliver the underlying security or currency against payment of
the exercise price. A put option is a similar contract that gives its purchaser,
in return for a premium, the right to sell the underlying security or currency
at a specified price during the option term or upon expiration. The writer of
the put option, who receives the premium, has the obligation, upon exercise, to
buy the underlying security or currency at the exercise price. Options on debt
securities are traded primarily in the OTC market rather than on any of the
several options exchanges.
OPTIONS ON INDICES OF DEBT SECURITIES--An index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of such securities. Index options operate in the same way as
more traditional options except that exercises of index options are effected
with cash payment and do not involve delivery of securities. Thus, upon exercise
of an index option, the purchaser will realize and the writer will pay, an
amount based on the difference between the exercise price and the closing price
of the index.
DEBT SECURITY INDEX FUTURES CONTRACTS--A debt security index futures
contract is a bilateral agreement pursuant to which one party agrees to accept
and the other party agrees to make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the debt securities
14
comprising the index is made; generally contracts are closed out prior to the
expiration date of the contract.
DEBT SECURITY AND CURRENCY FUTURES CONTRACTS--A debt security or
currency futures contract is a bilateral agreement pursuant to which one party
agrees to accept and the other party agrees to make delivery of the specific
type of debt security or currency called for in the contract at a specified
future time and at a specified price.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar
to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term.
Upon exercise of the option, the delivery of the futures position to the holder
of the option will be accomplished by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will assume
a short position in the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
INTEREST RATE PROTECTION TRANSACTIONS--The Fund may enter into
interest rate protection transactions, including interest rate swaps and
interest rate caps, collars and floors. Interest rate swap transactions involve
an agreement between two parties to exchange payments that are based,
respectively, on variable and fixed rates of interest and that are calculated on
the basis of a specified amount of principal (the "notional principal amount")
for a specified period of time. Interest rate cap and floor transactions involve
an agreement between two parties in which the first party agrees to make
payments to the counterparty when a designated market interest rate goes above
(in the case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which payments are made
when a designated market interest rate either goes above a designated ceiling
level or goes below a designated floor on predetermined dates or during a
specified time period.
The Fund expects to enter into interest rate protection transactions
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 intends to use these transactions as a hedge and not as a speculative
investment. Interest rate protection transactions are subject to risks
comparable to those described above with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities,
15
and will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. Accordingly, in as much as
segregated accounts will be established with respect to such transactions, UBS
Global AM and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the Investment Company Act of 1940 ("1940 Act"). The Fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any interest rate swaps that are not entered into on a net
basis and with respect to any interest rate caps, collars and floors that are
written by the Fund.
The Fund will enter into interest rate protection transactions only
with contra parties believed by UBS Global AM to present minimal credit risks in
accordance with guidelines established by the Fund's Board of Directors. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
CREDIT DEFAULT SWAPS--The Fund may invest in swap agreements. Swap
agreements are two-party contracts for periods ranging from a few weeks to
more than a year. In a standard swap transaction, two parties agree to
exchange the returns earned on specific assets, such as the return on, or
increase in value of, a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Risks inherent in the use of
swaps of any kind include: (1) swap contracts may not be assigned without the
consent of the counterparty; (2) potential default of the counterparty to the
swap; (3) absence of a liquid secondary market for any particular swap at any
time; and (4) possible inability of the Fund to close out the swap
transaction at a time that otherwise would be favorable for it to do so.
The Fund may purchase credit default swap contracts in order to
hedge against the risk of default of debt securities held it its portfolio.
In a credit default swap, the buyer receives credit protection from the
seller of the swap who guarantees the creditworthiness of the referenced
securities. In the event of a default by the issuer of the referenced
securities, the Fund would receive from the seller of the swap the par (or
other agreed-upon) value of a referenced debt obligation. In return, the
seller would receive from the Fund a periodic stream of payments over the
term of the contract provided that no event of default has occurred. A credit
default swap would involve the risk that the investment may expire worthless
and would only generate income in the event of an actual default by the
issuer of the underlying obligation (as opposed to a credit downgrade or
other indication of financial instability). It would also involve credit risk
- that the seller of the swap may fail to satisfy its payment obligations to
the Fund in the event of a default.
ORGANIZATION OF THE FUND; DIRECTORS AND OFFICERS; PRINCIPAL HOLDERS AND
MANAGEMENT OWNERSHIP OF SECURITIES
The Fund was incorporated under the laws of the state of Maryland on
October 8, 1993. The Fund is governed by a Board of Directors which oversees the
Fund's operations. 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 are delegated to the Fund's officers and to UBS Global AM, subject to the
investment objectives and policies of the Fund and to general supervision by the
Board.
Each Director serves until the next annual meeting of shareholders or
until his or her successor is elected and qualified or until he or she resigns
or is otherwise removed. Officers are appointed by the Directors and serve at
the pleasure of the Board. Each Director who has attained the age of seventy-two
(72) years will be subject to retirement on the last day of the month in which
he or she attains such age. The tables below show, for each Director and
officer, his or her name, address and age, the position held with the Fund, the
length of time served as a Director or officer of the Fund, the Director's or
officer's principal occupations during the last five years, the number of funds
in the UBS fund complex overseen by the Director or for which a person served as
an officer, and other directorships held by such Director.
16
INTERESTED DIRECTORS
TERM OF
OFFICE NUMBER OF
POSITION(S) AND PRINCIPAL PORTFOLIOS IN OTHER
HELD LENGTH OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS WITH OF TIME DURING PAST 5 OVERSEEN BY HELD BY
AND AGE FUND SERVED YEARS DIRECTOR DIRECTOR
------------------------ ------------ ------------- ------------------------- -------------------- -----------------------
Margo N. Alexander+; 58 Director Since 1996 Mrs. Alexander is Mrs. Alexander is a None
c/o UBS Global Asset retired. She was an director or trustee
Management executive vice president of 16 investment
51 West 52nd Street of UBS Financial Services companies
New York, NY 10019 Inc. (from March 1984 to (consisting of 33
December 2002). She was portfolios) for
chief executive officer which UBS Global AM
(from January 1995 to or one of its
October 2000), a director affiliates serves as
(from January 1995 to investment advisor,
September 2001) and sub-advisor or
chairman (from March 1999 manager.
to September 2001) of UBS
Global AM (formerly
known as Mitchell
Hutchins Asset Management
Inc.).
Meyer Feldberg++; 63 Director Since 1996 Professor Feldberg is a Professor Feldberg Professor Feldberg
Columbia Business School senior advisor to Morgan is a director or is also a director
33 West 60th Street 7th Stanley (financial trustee of 30 of Primedia Inc.
Floor services) (since March investment companies (publishing),
New York, NY 10023-7905 2005). He is also Dean (consisting of 47 Federated
Emeritus and Sanford portfolios) for Department Stores,
Bernstein Professor of which UBS Global AM Inc. (operator of
Leadership and Ethics at or one of its department stores),
Columbia Business School, affiliates serves as Revlon, Inc.
although on a two year investment advisor, (cosmetics), and
leave of absence. Prior sub-advisor or SAPPI, Ltd.
to July 2004, he was Dean manager. (producer of paper).
and Professor of
Management of the
Graduate School of
Business at Columbia
University (since 1989).
17
INDEPENDENT DIRECTORS
TERM OF
OFFICE NUMBER OF
POSITION(S) AND PRINCIPAL PORTFOLIOS IN OTHER
HELD LENGTH OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS WITH OF TIME DURING PAST 5 OVERSEEN BY HELD BY
AND AGE FUND SERVED YEARS DIRECTOR DIRECTOR
------------------------ ------------ ------------- ------------------------- -------------------- -----------------------
Richard Q. Armstrong; 70 Director Since 1995 Mr. Armstrong is chairman Mr. Armstrong is a None.
c/o Willkie Farr & and and principal of R.Q.A. director or trustee
Gallagher LLP Chairman Enterprises (management of 16 investment
787 Seventh Avenue of the consulting firm) (since companies
New York, NY 10019-6099 Board of April 1991 and principal (consisting of 33
Directors occupation since March portfolios) for
1995). which UBS Global AM
or one of its
affiliates serves as
investment advisor,
sub-advisor or
manager.
David J. Beaubien; 71 Director Since 2001 Mr. Beaubien is retired Mr. Beaubien is a Mr. Beaubien is
84 Doane Road (since 2003). He was director or trustee also a director of
Ware, MA 01082 chairman of Yankee of 16 investment IEC Electronics,
Environmental Systems, companies Inc., a
Inc., a manufacturer of (consisting of 33 manufacturer of
meteorological measuring portfolios) for electronic
systems (since 1991). which UBS Global AM assemblies.
or one of its
affiliates serves as
investment advisor,
sub-advisor or
manager.
Richard R. Burt; 58 Director Since 1995 Mr. Burt is chairman of Mr. Burt is a Mr. Burt is also a
1275 Pennsylvania Ave., Diligence LLC director or trustee director of
N.W. Washington, D.C. (international of 16 investment Hollinger
20004 information and security companies International Inc.
firm) and IEP Advisors (consisting of 33 (publishing), HCL
(international portfolios) for Technologies, Ltd.
investments and which UBS Global AM (software and
consulting firm). or one of its information
affiliates serves as technologies), The
investment Central European
information advisor, Fund, Inc., The
sub-advisor or Germany Fund, Inc.,
manager. IGT, Inc. (provides
technology to gaming
and waging industry).
18
TERM OF
OFFICE NUMBER OF
POSITION(S) AND PRINCIPAL PORTFOLIOS IN OTHER
HELD LENGTH OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS WITH OF TIME DURING PAST 5 OVERSEEN BY HELD BY
AND AGE FUND SERVED YEARS DIRECTOR DIRECTOR
------------------------ ------------ ------------- ------------------------- -------------------- -----------------------
He is also a
director or trustee of
funds in the Scudder
Mutual Funds Family
(consisting of 52
portfolios).
William D. White; 71 Director Since 2001 Mr. White is retired Mr. White is a None
P.O. Box 19916 (since 1994). director or trustee
Upper Black Eddy, PA of 16 investment
18972 companies
(consisting of 33
portfolios) for
which UBS Global AM
or one of its
affiliates serves as
investment advisor,
sub-advisor or
manager.
----------
+ Mrs. Alexander is deemed an "interested person" of the Fund as defined in
the Investment Company Act because an immediate family member is an
employee of an affiliate of UBS Global AM.
++ Professor Feldberg is deemed an "interested person" of the Fund as defined in
the Investment Company Act because he is a senior advisor to Morgan Stanley,
a financial services firm with which the Fund may conduct transactions.
OFFICERS
PRINCIPAL OCCUPATION(S)
TERM OF OFFICE DURING PAST 5 YEARS; NUMBER OF
NAME, ADDRESS POSITION(S) HELD AND LENGTH OF PORTFOLIOS IN FUND COMPLEX FOR
AND AGE WITH FUND TIME SERVED WHICH PERSON SERVES AS OFFICER
------------------------ ------------------- ---------------- -----------------------------------------------
Joseph Allessie*; 40 Vice President and Since 2005 Mr. Allessie is a director and associate
Assistant Secretary general counsel at UBS Global Asset Management
(US) Inc and UBS Global Asset Management
(Americas) Inc. (collectively, "UBS Global AM -
Americas region") (since 2005). Prior to
joining UBS Global AM - Americas region, he was
senior vice president and general counsel of
Kenmar Advisory Corp. (from 2004 to 2005).
Prior to that Mr. Allessie was general counsel
and secretary of GAM USA Inc., GAM Investments,
GAM Services, GAM Funds, Inc. and the GAM
Avalon Funds (from 1999 to 2004). Such entities
are affiliates of UBS
19
PRINCIPAL OCCUPATION(S)
TERM OF OFFICE DURING PAST 5 YEARS; NUMBER OF
NAME, ADDRESS POSITION(S) HELD AND LENGTH OF PORTFOLIOS IN FUND COMPLEX FOR
AND AGE WITH FUND TIME SERVED WHICH PERSON SERVES AS OFFICER
------------------------ ------------------- ---------------- -----------------------------------------------
Global AM - Americas region. Prior to joining
GAM, Mr. Allessie was Regulatory Officer to the
State of New Jersey, Department of Law and
Public Safety, Bureau of Securities (from 1993
to 1999). Mr. Allessie is a vice president and
assistant secretary of 20 investment companies
(consisting of 75 portfolios) for which UBS
Global AM - Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
W. Douglas Beck*; 38 President Since 2005 Mr. Beck is an executive director and head of
product development and management for UBS
Global AM - Americas region (since 2002).
From March 1998 to November 2002, he held
various positions at Merrill Lynch, the most
recent being first vice president and
co-manager of the managed solutions group.
Mr. Beck is president of 20 investment
companies (consisting of 75 portfolios) for
which UBS Global AM - Americas region or one
of its affiliates serves as investment
advisor, sub-advisor or manager, and was vice
president of such investment companies from
2003 to 2005.
Thomas Disbrow*; 39 Vice President and Since 2000 (Vice Mr. Disbrow is a director, head of retail
Treasurer President); mutual fund operations and co-head of the
Since 2004 mutual fund finance department of UBS Global
(Treasurer) AM - Americas region. Prior to November 1999,
he was a vice president of Zweig/Glaser
Advisers. Mr. Disbrow is a vice president and
treasurer of 16 investment companies
(consisting of 33 portfolios) and vice
president and assistant treasurer of four
investment companies (consisting of 42
portfolios) for which UBS
20
PRINCIPAL OCCUPATION(S)
TERM OF OFFICE DURING PAST 5 YEARS; NUMBER OF
NAME, ADDRESS POSITION(S) HELD AND LENGTH OF PORTFOLIOS IN FUND COMPLEX FOR
AND AGE WITH FUND TIME SERVED WHICH PERSON SERVES AS OFFICER
------------------------ ------------------- ---------------- -----------------------------------------------
Global AM - Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Mark F. Kemper**, 47 Vice President and Since 2004 Mr. Kemper is general counsel of UBS Global AM
Secretary - Americas region (since July 2004). Mr. Kemper
also is an executive director of UBS Global AM
- Americas region. He was deputy general
counsel of UBS Global Asset Management
(Americas) Inc. ("UBS Global AM - Americas")
from July 2001 to July 2004. He has been
secretary of UBS Global AM - Americas since
1999 and assistant secretary of UBS Global
Asset Management Trust Company since 1993.
Mr. Kemper is secretary of UBS Global AM -
Americas region (since 2004). Mr. Kemper is
vice president and secretary of 20 investment
companies (consisting of 75 portfolios) for
which UBS Global AM - Americas region or one of
its affiliates serves as investment advisor,
sub-advisor or manager.
Joanne M. Kilkeary*; 37 Vice President and Since 2004 Ms. Kilkeary is an associate director (since
Assistant Treasurer 2000) and a senior manager (since 2004) of the
mutual fund finance department of UBS Global AM
- Americas region. Ms. Kilkeary is a vice
president and assistant treasurer of 16
investment companies (consisting of 33
portfolios) for which UBS Global AM - Americas
region or one of its affiliates serves as
investment advisor, sub-advisor or manager.
Joseph T. Malone*; 37 Vice President and Since 2004 Mr. Malone is a director and co-head of the
Assistant Treasurer mutual fund finance department of UBS Global
AM -Americas region. From August 2000 through
June 2001, he was the controller at AEA
Investors Inc. From March 1998 to August 2000,
Mr. Malone was a manager within the investment
management services practice of
PricewaterhouseCoopers LLC. Mr. Malone is vice
president and assistant treasurer of 16
investment companies (consisting of 33
portfolios) and vice president, treasurer and
principal accounting officer of four investment
companies (consisting of 42 portfolios) for
which UBS Global AM - Americas region or one of
its affiliates serves as investment advisor,
sub-advisor or manager.
Joseph McGill*; 43 Vice President and Since 2004 Mr. McGill is an executive director and chief
21
PRINCIPAL OCCUPATION(S)
TERM OF OFFICE DURING PAST 5 YEARS; NUMBER OF
NAME, ADDRESS POSITION(S) HELD AND LENGTH OF PORTFOLIOS IN FUND COMPLEX FOR
AND AGE WITH FUND TIME SERVED WHICH PERSON SERVES AS OFFICER
------------------------ ------------------- ---------------- -----------------------------------------------
Chief Compliance compliance officer at UBS Global AM - Americas
Officer region (since 2003). Prior to joining UBS
Global AM - Americas region, he was Assistant
General Counsel at J. P. Morgan Investment
Management (from 1999 to 2003). Mr. McGill is a
vice president and chief compliance officer of
20 investment companies (consisting of 75
portfolios) for which UBS Global AM - Americas
region or one of its affiliates serves as
investment advisor, sub-advisor or manager.
John Penicook **; 47 Vice President Since 2002 Mr. Penicook is a managing director and global
head of fixed income of UBS Global AM.
Mr. Penicook is a vice president of three
investment companies (consisting of three
portfolios) for which UBS Global AM - Americas
region or one of its affiliates serves as
investment advisor, sub-advisor or manager.
Eric Sanders*; 39 Vice President and Since 2005 Mr. Sanders is a director and associate general
Assistant Secretary counsel of UBS Global AM-Americas region
(since July 2005). From 1996 until June 2005,
he held various positions at Fred Alger &
Company, Incorporated, the most recent being
assistant vice president and associate general
counsel. Mr. Sanders is a vice president and
assistant secretary of 16 investment companies
(consisting of 33 portfolios) for which UBS
Global AM - Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Uwe Schillhorn**; 41 Vice President Since 2004 Mr. Schillhorn is an executive director, and
head of emerging markets debt (since 2004) of
UBS Global AM. Mr. Schillhorn is a vice
president of two investment companies
(consisting of two portfolios) for which UBS
Global AM - Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager.
Keith A. Weller*; 44 Vice President and Since 1995 Mr. Weller is an executive director and
Assistant Secretary associate general counsel of UBS Global AM -
Americas region. Mr. Weller is a vice president
and assistant secretary of 20 investment
companies (consisting of 75 portfolios) for
which UBS Global AM - Americas region or one of
its affiliates serves as investment advisor,
sub-advisor or manager.
22
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is One North Wacker Drive, Chicago, Illinois
60606.
INFORMATION ABOUT DIRECTOR OWNERSHIP OF FUND SHARES
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED
INVESTMENT COMPANIES OVERSEEN
BY DIRECTOR FOR WHICH UBS GLOBAL
AM OR AN AFFILIATE SERVES
DOLLAR RANGE OF EQUITY AS INVESTMENT ADVISOR,
DIRECTOR SECURITIES IN FUND+ SUB-ADVISOR OR MANAGER+
------------------------ ------------------------------ -------------------------------------
INTERESTED DIRECTORS
Margo N. Alexander None Over $100,000
Meyer Feldberg None Over $100,000
INDEPENDENT DIRECTORS
Richard Q. Armstrong None Over $100,000
David J. Beaubien None Over $100,000
Richard R. Burt None Over $100,000
William D. White None Over $100,000
----------
+ Information regarding ownership of shares of the Fund is as of December 31,
2004; information regarding ownership of shares in all registered
investment companies overseen by Director for which UBS Global AM or an
affiliate serves as investment advisor, sub-advisor or manager is as of
December 31, 2004.
COMMITTEES
The Fund has an Audit Committee and a Nominating and Corporate
Governance Committee. The Audit Committee consists of Mr. Richard Q.
Armstrong (chairperson), Mr. David J. Beaubien, Mr. Richard R. Burt and Mr.
William D. White. The following Independent Directors are members of the
Nominating and Corporate Governance Committee: Mr. Richard R. Burt
(chairperson) and Mr. William D. White.
The Audit Committee is responsible for, among other things: (i)
overseeing the scope of the Fund's audit; (ii) overseeing the Fund's accounting
and financial reporting policies, practices and internal controls; and (iii)
approving, and recommending to the Board for ratification, the selection,
appointment, retention or termination of the Fund's independent registered
public accounting firm. In furtherance of its duties, the Committee also is
responsible for, among other things: receiving periodic reports from the Fund's
independent registered public accounting firm regarding its independence and
discussing any disclosed relationships or services that may diminish the
objectivity and independence of the independent registered public accounting
firm; inquiring as to the Fund's qualification under Subchapter M of the
Internal
23
Revenue Code and the amounts distributed and reported to shareholders;
reviewing and discussing the Fund's audited annual financial statements with
management and the Fund's independent registered public accounting firm;
reviewing with the independent registered public accounting firm any problems or
difficulties the independent registered public accounting firm encountered
during the conduct of the audit; and reporting to the full Board and making
recommendations as it deems necessary or appropriate. Although the Audit
Committee has the responsibilities described above, it is not responsible for
planning or conducting the Fund's audit or determining whether the Fund's
financial statements are complete and accurate and are in accordance with
generally accepted accounting principles. Absent actual knowledge to the
contrary, Audit Committee members are entitled to rely on the accuracy of the
information they receive from persons within and outside the Fund.
The Audit Committee currently normally meets in conjunction with
regular Board meetings, or more frequently as called by its chairperson. During
the fiscal year ended October 31, 2004, the Audit Committee held six meetings.
The Board has also established a Nominating and Corporate Governance
Committee that acts pursuant to a written charter. The Nominating and Corporate
Governance Committee is responsible for, among other things, selecting,
evaluating and recommending to the Board candidates to be nominated as
additional Independent Directors of the Board. The Nominating and Corporate
Governance Committee held three meetings during the fiscal year ended October
31, 2004. The Nominating and Corporate Governance Committee will consider
nominees recommended by Shareholders if a vacancy among the Independent
Directors occurs. In order to recommend a nominee, a Shareholder should send a
letter to the chairperson of the Nominating and Corporate Governance Committee,
Mr. Richard Burt, care of the Secretary of the Fund at UBS Global Asset
Management (US) Inc., 51 West 52nd Street, New York, New York 10019-6114 and
indicate on the envelope "Nominating and Corporate Governance Committee." The
Shareholder's letter should state the nominee's name and should include the
nominee's resume or CURRICULUM VITAE and must be accompanied by a written
consent of the individual to stand for election if nominated for the Board and
to serve if elected by the Shareholders.
24
INFORMATION ABOUT INDEPENDENT DIRECTOR OWNERSHIP OF SECURITIES ISSUED BY UBS
GLOBAL AM OR ANY COMPANY CONTROLLING, CONTROLLED BY OR UNDER COMMON CONTROL WITH
UBS GLOBAL AM.
As of December 31, 2004, the Independent Directors and their immediate
family members did not own any securities issued by UBS Global AM or any company
controlling, controlled by or under common control with UBS Global AM.
COMPENSATION
Each Independent Director receives, in the aggregate from UBS Global
AM Funds, an annual retainer of $70,000 and a $13,000 fee for each regular board
meeting (and each in-person special board meeting) actually attended.
Independent Directors who participate in previously scheduled in-person meetings
by telephone to accommodate other business obligations are paid $2,000 for such
meetings. Independent Directors who participate in previously scheduled
in-person meetings by telephone because of illness or other unavoidable
circumstances are paid the full meeting fee. The chairperson of the Audit
Committee receives annually $25,000. Effective October 1, 2004, the chairperson
of the Nominating and Corporate Governance Committee receives annually $15,000.
Effective October 1, 2004, the Chairman of the Board receives annually $30,000.
(If a board member simultaneously holds more than one position on the Board, he
or she is paid only the higher of the fees otherwise payable for these
positions.) The foregoing fees will be allocated among all UBS Global AM Funds
(or each relevant fund in the case of a special meeting) as follows: (i)
one-half of the expense will be allocated pro rata based on the funds' relative
net assets at the end of the calendar quarter preceding the date of payment and
(ii) one-half of the expense will be allocated equally according to the number
of such funds (i.e., expense divided by number of funds). No officer, Director
or employee of UBS Global AM or any of its affiliates presently receives any
compensation from the funds for acting as a board member or officer. All Board
members are reimbursed for expenses incurred in attending meetings.
The table below includes certain information relating to the
compensation of the Fund's current board members and the compensation of those
Board members from all funds for which UBS Global AM or an affiliate served as
investment advisor, sub-advisor or manager during the periods indicated.
COMPENSATION TABLE+
AGGREGATE TOTAL COMPENSATION FROM THE
COMPENSATION FUND AND THE FUND
NAME OF PERSON, POSITION FROM FUND* COMPLEX**
-------------------------- ------------------ ------------------------------
Richard Q. Armstrong,
Director $ 2,663 $ 150,875
David J. Beaubien,
Director $ 2,278 129,000
Richard R. Burt,
Director $ 2,245 127,000
Meyer Feldberg++,
Director $ 2,452 249,000
25
William D. White,
Director $ 2,278 129,000
----------
+ Only Independent Directors are compensated by the funds for which UBS
Global AM or an affiliate serves as investment advisor, sub-advisor or
manager; Board members who are "interested persons," as defined by the
Investment Company Act, do not receive compensation from the Funds.
++ Until March 1, 2005, Professor Feldberg was an independent board member and
was compensated as such by the funds for which UBS Global AM or an
affiliate served as investment advisor, sub-advisor or manager. Effective
March 1, 2005, Professor Feldberg is an "interested person" of the funds
due to his position as Senior Advisor with Morgan Stanley. As such,
Professor Feldberg is no longer compensated by the funds for which UBS
Global AM serves as investment advisor, sub-advisor, or manager.
* Represents total fees paid by the Fund to each board member indicated for
the fiscal year ended October 31, 2004.
** Represents fees paid during the calendar year ended December 31, 2004 to
each Independent Board member by: (a) 16 investment companies in the case
of Messrs. Armstrong, Beaubien, Burt and White; and (b) 31 investment
companies in the case of Mr. Feldberg, for which UBS Global AM or one of
its affiliates served as investment advisor, sub-advisor or manager. No
fund within the UBS Fund complex has a bonus, pension, profit sharing or
retirement plan.
PRINCIPAL HOLDERS OF SECURITIES AND MANAGEMENT OWNERSHIP OF SECURITIES
As October 25, 2005, directors and officers of the Fund owned in
the aggregate less than 1% of the outstanding shares of the Fund. As of
October 25, 2005, none of the persons on whose behalf those Shares were held
was known by the Fund to own 5% or more of the Fund's Shares.
PROXY VOTING POLICIES
The Board of the Fund believes that the voting of proxies on
securities held by the Fund is an important element of the overall investment
process. As such, the Board has delegated the responsibility to vote such
proxies to the Fund's investment advisor, UBS Global AM.
The proxy voting policy of UBS Global AM is based on its belief that
voting rights have economic value and must be treated accordingly. Generally,
UBS Global AM expects the boards of directors of companies issuing securities
held by its clients to act as stewards of the financial assets of the company,
to exercise good judgment and practice diligent oversight with the management of
the company. While there is no absolute set of rules that determines appropriate
corporate governance under all circumstances and no set of rules will guarantee
ethical behavior, there are certain benchmarks, which, if substantial progress
is made towards them, give evidence of good corporate governance. UBS Global AM
may delegate to an independent proxy voting and research service the authority
to exercise the voting rights associated with certain client holdings. Any such
delegation shall be made with the direction that the votes be exercised in
accordance with UBS Global AM's proxy voting policy.
When UBS Global AM's view of a company's management is favorable, UBS
Global AM generally supports current management initiatives. When UBS Global
AM's view is that changes to the management structure would probably increase
Shareholder value, UBS Global AM may not support existing management proposals.
In general, UBS Global AM: (1) opposes proposals which act to entrench
management; (2) believes that boards should be independent of company management
and composed of persons with requisite skills, knowledge and experience; (3)
opposes structures which impose financial constraints on changes in control;
26
(4) believes remuneration should be commensurate with responsibilities and
performance; and (5) believes that appropriate steps should be taken to ensure
the independence of registered public accounting firms.
UBS Global AM has implemented procedures designed to identify whether
it has a conflict of interest in voting a particular proxy proposal, which may
arise as a result of its or its affiliates' client relationships, marketing
efforts or banking, investment banking and broker/dealer activities. To address
such conflicts, UBS Global AM has imposed information barriers between it and
its affiliates who conduct banking, investment banking and broker/dealer
activities and has implemented procedures to prevent business, sales and
marketing issues from influencing its proxy votes. Whenever UBS Global AM is
aware of a conflict with respect to a particular proxy, its appropriate local
corporate governance committee is required to review and agree to the manner in
which such proxy is voted.
You may obtain information about the Fund's proxy voting decisions,
without charge, by contacting the Fund directly at 1-800-647 1568, online on the
Fund's website (www.ubs.com/ubsglobalam-proxy), or on the EDGAR database on the
SEC's website (http://www.sec.gov).
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS
UBS Global AM is the Fund's investment adviser and administrator
pursuant to a contract dated September 30, 1993 with the Fund ("Advisory and
Administration Contract"). Pursuant to the Advisory and Administration 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. As administrator, UBS Global AM supervises all matters relating to
the operation of the Fund and obtains for it corporate, administrative and
clerical personnel, office space, equipment and services, including arranging
for the periodic preparation, updating, filing and dissemination of proxy
materials, tax returns and reports to the Fund's Board, Shareholders and
regulatory authorities.
Under the Advisory and Administration Contract, the Fund pays UBS
Global AM a fee, computed weekly and paid monthly, at the annual rate of 1.25%
of the Fund's average weekly total assets minus liabilities other than the
aggregate indebtedness constituting leverage ("average net assets") for the
first $200 million of assets under management and 1.00% of the Fund's average
net assets for amounts above $200 million.
During the fiscal years indicated, the Fund paid (or accrued) the
following investment advisory and administration fees:
FISCAL YEARS ENDED OCTOBER 31,
2004 2003 2002
------------------- ------------------------------ -------------------
$ 3,869,604 $ 3,730,496 $ 3,488,011
In addition to the payments to UBS Global AM under the Advisory and
Administration Contract described above, the Fund pays certain other costs,
including (1) the costs (including brokerage commissions) of securities
purchased or sold by the Fund and any
27
losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the Fund by UBS Global AM; (3) organizational and offering
expenses of the Fund, whether or not advanced by UBS Global AM; (4) filing fees
and expenses relating to the registration and qualification of the Fund's shares
and the Fund under federal securities laws and/or state laws; (5) fees and
salaries payable to the Fund's Directors and officers who are not interested
persons of the Fund or UBS Global AM; (6) all expenses incurred in connection
with the Fund's Directors' services, including travel expenses; (7) taxes
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectible items of deposit and any other insurance or
fidelity bonds; (9) any costs, expenses or losses arising out of a liability of
or claims for damages or other relief asserted against the Fund for violation of
any law; (10) legal, accounting and auditing expenses, including legal fees of
special counsel for those Directors of the Fund who are not interested persons
of the Fund; (11) charges of custodians, transfer agents and other agents
(including any lending agent); (12) costs of preparing share certificates; (13)
expenses of setting in type, printing and mailing reports and proxy materials to
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel, costs of actions, suits or proceedings to which the Fund is a party
and the expenses the Fund may incur as a result of its legal obligation to
provide indemnification to its officers, directors, agents and Shareholders)
incurred by the Fund; (15) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations; (16)
costs of mailing and tabulating proxies and costs of meetings of shareholders,
the Board and any committees thereof; (17) the costs of investment company
literature and other publications provided by the Fund to its Directors and
officers; (18) costs of mailing, stationery and communications equipment; (19)
changes and expenses of any outside pricing service used to value portfolio
securities; (20) interest on borrowings of the Fund; (21) fees and expenses of
listing and maintaining any listing of the Fund's Shares on any national
securities exchange; (22) expenses incident to any dividend reinvestment plan;
and (23) costs and expenses(including rating agency fees) associated with the
issuance of any preferred stock.
BOARD APPROVAL OF ADVISORY AND ADMINISTRATION CONTRACT
BACKGROUND. At a meeting of the Fund on July 20, 2005, the members of the
Board, including the Independent Directors as defined in the 1940 Act, as
amended, considered and approved the continuance of the Investment Advisory
and Administration Contract for the Fund. In preparing for the meeting, the
Board members had requested and received information from UBS Global AM to
assist them, including performance and expense information for other
investment companies with similar investment objectives to the Fund. The
Board received and considered a variety of information about UBS Global AM,
as well as the advisory and administrative arrangements for the Fund. The
Independent Directors discussed the materials initially provided by
management prior to the scheduled Board meeting in a session with their
independent legal counsel and requested, and received from management,
supplemental materials to assist them in their consideration of the Advisory
and Administration Contract. Subsequently, the Chairman of the Board and
independent legal counsel to the Independent Directors met with management
representatives to discuss generally how information would be provided at the
Board meeting. The Independent Directors also met for several hours the
evening before the Board meeting and met again after management's
presentation was completed to review the disclosure that had been made to
them at the meeting. At all of these sessions the Independent Directors met
in session with their independent legal counsel. The Independent Directors
also received a memorandum from their independent legal counsel discussing
the duties of Board members in considering approval of advisory and
administration contracts. In its consideration of the approval of the
Advisory and Administration Contract, the Board, including the Independent
Directors, considered the following factors:
NATURE, EXTENT AND QUALITY OF THE SERVICES UNDER THE ADVISORY AND
ADMINISTRATION CONTRACT. The Board received and considered information
regarding the nature, extent and quality of management services provided to
the Fund by UBS Global AM under the Advisory and Administration Contract
during the past year. The Board also received a description of the
administrative and other services rendered to the Fund and its shareholders
by UBS Global AM. The Board noted that information received at regular
meetings throughout the year related to the services rendered by UBS Global
AM concerning the management of the Fund's affairs and UBS Global AM's role
in coordinating providers of other services to the Fund, including custody,
accounting and transfer agency services. The Board's evaluation of the
services provided by UBS Global AM took into account the Board's knowledge
and familiarity gained as board members of funds in the UBS New York fund
complex, including the scope and quality of UBS Global AM's investment
management and other capabilities and the quality of its administrative and
other services. The Board observed that the scope of services provided by
UBS Global AM had expanded over time as a result of regulatory and other
developments, including maintaining and monitoring its own and the Fund's
expanded compliance programs.
The Board had available to it the qualifications, backgrounds and
responsibilities of the Fund's senior personnel and the portfolio management
team primarily responsible for the day-to-day portfolio management of the
Fund and recognized that these persons report to the Board regularly, some at
every Board meeting. The Board also considered, based on its knowledge of
UBS Global AM and its affiliates, the financial resources available to UBS
Global AM and its parent organization, UBS AG.
The Board reviewed how transactions in Fund assets are effected.
In conducting its review, the Board had available UBS Global AM's brokerage
policies and practices, the standards applied in seeking best execution, UBS
Global AM's soft dollar policies and practices, the use of a broker
affiliated with UBS Global AM and the existence of quality controls
applicable to brokerage allocation procedures. In addition, management also
reported to the Board on, among other things, its disaster recovery plans and
portfolio manager compensation plan.
The Board concluded that, overall, it was satisfied with the nature,
extent and quality of services provided, and expected to be provided, to the
Fund under the Advisory and Administration Contract.
FUND PERFORMANCE. The Board received and considered performance information
of the Fund compared to other funds (the "Performance Universe") selected by
Lipper, Inc. ("Lipper"), an independent provider of investment company data,
over the one-, three-, five- and ten-year periods ended May 31, 2005 and
since inception. The Board was provided with a description of the
methodology Lipper used to determine the similarity of the Fund with the
funds included in the Performance Universe. The Board also noted that it had
received information throughout the year at periodic intervals with respect
to the Fund's performance.
The comparative Lipper information showed that the Fund's NAV
performance as compared against the Performance Universe was consistently at
or below average for the comparative periods. Specifically, the Fund's NAV
performance was in the third quartile for the one-year period and since the
Fund's inception and in the fourth quartile for the three-, five- and ten
year periods. The Board in its review noted that more than three-quarters of
the Performance Universe utilized leverage, most in excess of twenty percent
(20%), allowing for amplified returns in this prolonged bull market, but with
an increased level of risk. Management explained that the Fund, which has a
lower beta/duration (risk profile), has underperformed its peers during this
period, although it has outperformed on corrections, as might be expected
with a lower beta/duration. The Board also noted that the Fund has performed
on par with its peer group since the inception of the Fund. Based on its
review, the Board concluded that the Fund's investment performance was
satisfactory.
MANAGEMENT FEE AND EXPENSE RATIO. The Board reviewed and considered the
contractual advisory and administration fee (the "Contractual Management
Fee") payable by the Fund to UBS Global AM in light of the nature, extent and
quality of the advisory and administrative services provided by UBS Global
AM. The Board also reviewed and considered the actual fee rate (the "Actual
Management Fee") paid by the Fund.
Additionally, the Board received and considered information
comparing the Fund's Contractual Management Fee, Actual Management Fee and
overall expenses with those of funds in a group of Funds selected and
provided by Lipper (the "Expense Group").
In connection with its consideration of the Fund's management fees,
the Board also received information on an affiliate of UBS Global AM's
standard institutional account fees for accounts of a similar investment type
to the Fund. The Board noted that these fees were lower than the Contractual
Management Fee and Actual Management Fee for the Fund, but also noted
management's explanation that comparisons with such accounts may be of
limited relevance given the different structures and regulatory requirements
of closed-end funds versus such accounts, the differences in the levels of
services required by closed-end funds and such accounts and the memorandum
provided by the Fund's legal counsel discussing court decisions regarding the
limited usefulness of such comparisons.
The comparative Lipper information showed that the Fund's
Contractual Management Fee and Actual Management Fee were in the last
quintile in the Fund's Expense Group and was the highest in its Expense Group
(i.e., sixth out of six for the periods included in the Lipper report). In
addition, the Board noted that the Fund's total expenses were in the third
quintile in its Expense Group for the comparison period.. The Board noted
that although the Fund had a high Contractual Management Fee and Actual
Management Fee, the Fund's total expenses were average in comparison with the
Fund's Expense Group, resulting from below average nonmanagement fees.
After further discussion, the Board requested that management
consider the possibility of instituting a breakpoint for the Fund,
particularly in light of the Fund's proposed rights offering. After further
discussion, management recommended, and the Board approved, that the Fund's
management fee, currently 1.25%, be revised to provide for a breakpoint such
that the Fund's management fee would remain at 1.25% of the Fund's average
weekly net assets ("average net assets") for the first $200 million of assets
under management and be reduced to 1.00% of the Fund's average net assets for
amounts above $200 million.
Taking all of the above into consideration, the Board determined
that the Contractual Management Fee was reasonable in light of the nature,
extent and quality of the services provided to the Fund under the Advisory
and Administration Contract.
ADVISOR PROFITABILITY. The Board received and considered a profitability
analysis of UBS Global AM and its affiliates in providing services to the
Fund. The Board also received profitability information with respect to the
UBS New York Fund complex as a whole. In addition, the Board received
information with respect to UBS Global AM's allocation methodologies used in
preparing this profitability data. UBS Global AM's profitability was
considered not excessive in light of the nature, extent and quality of the
services provided to the Fund.
ECONOMIES OF SCALE. The Board received and considered information from
management regarding whether it has achieved economies of scale with respect
to the management of the Fund, whether the Fund has appropriately benefited
from any economies of scale, and whether there is potential realization of
further economies of scale. The Board considered whether economies of scale
in the provision of services to the Fund were being passed along to
shareholders.
In conducting its review, the Board noted that the Fund's
Contractual Management Fee did not currently contain any breakpoints but that
management had proposed, and the Board had approved, the institution of a
breakpoint in the Fund's management fee, as described above. As the Fund's
current asset level exceeded the breakpoint, and as any increase in assets
due to the proposed rights offering would incur the management fee at the
level above the breakpoint, the Board determined that actual economies of
scale (on a going forward basis) existed in the form of the breakpoint to the
Contractual Management Fee. Management also noted that, if the proposed
rights offering is completed, to the extent fixed costs are spread over more
assets, the Fund's shareholders may receive a marginal benefit from economies
of scale.
Generally, in light of information provided and discussed, the
Board believed that UBS Global AM's sharing of current economies of scale
with the Fund was acceptable.
OTHER BENEFITS TO UBS GLOBAL AM. The Board considered other benefits
received by UBS Global AM and its affiliates as a result of its relationship
with the Fund, including the opportunity to offer additional products and
services to Fund shareholders.
In light of the costs of providing investment management,
administrative and other services to the Fund and UBS Global AM's ongoing
commitment to the Fund, the profits and other ancillary benefits that UBS
Global AM and its affiliates received were considered reasonable.
In light of all of the foregoing, the Board approved the Advisory
and Administration Contract to continue for another year.
In making its decision, the Board identified no single factor as
being determinative in approving the Advisory and Administration Contract.
The Independent Directors were advised by separate independent legal counsel
throughout the entire process. The Board discussed the proposed continuance
of the Advisory and Administration Contract in a private session with their
independent legal counsel at which no representatives of UBS Global AM were
present.
PORTFOLIO MANAGER. UBS Global AM's investment professionals are organized
into investment management teams, with a particular team dedicated to a
specific asset class. Mr. Schillhorn is the lead portfolio manager for the
Fund.
The following table provides information relating to other accounts managed
by Mr. Schillhorn as of October 31, 2004.
REGISTERED OTHER POOLED
INVESTMENT INVESTMENT OTHER
COMPANIES VEHICLES ACCOUNTS
----------- ------------ --------
Number of Accounts Managed 2 10 *9
Number of Accounts Managed with
Performance-Based Advisory Fees None None None
Assets Managed (in millions) $--- $--- $---
Assets Managed with Performance-
Based Advisory Fees (in millions) None None None
-----------------
* approximately
The management of the Fund and other accounts could result in potential
conflicts of interest if the Fund and other accounts have different
objectives, benchmarks and fees because the portfolio manager and his team
must allocate time and investment expertise across multiple accounts,
including the Fund. The portfolio manager and his team manage the Fund and
other accounts utilizing a model portfolio approach that groups similar
accounts within a model portfolio. UBS Global AM manages accounts according
to the appropriate model portfolio, including where possible, those accounts
that have specific investment restrictions. Accordingly, portfolio holdings,
position sizes, and industry and sector exposures tend to be similar across
accounts, which may minimize the potential for conflicts of interest.
If a portfolio manager identifies a limited investment opportunity that may
be suitable for more than one account or model portfolio, the Fund may not be
able to take full advantage of that opportunity due to an allocation of
filled purchase or sale orders across all eligible model portfolios and
accounts. To deal with these situations, UBS Global AM has adopted procedures
for allocating portfolio trades across multiple accounts to provide fair
treatment to all accounts.
The management of personal accounts by a portfolio manager may also give rise
to potential conflicts of interest. UBS Global AM and the Fund have adopted
Codes of Ethics that govern such personal trading but there is no assurance
that the Codes will adequately address all such conflicts.
The compensation received by portfolio managers at UBS Global AM, including
Mr. Schillhorn, includes a base salary and incentive compensation based on
their personal performance. UBS Global AM's compensation and benefits
programs are designed to provide its investment professionals with incentives
to excel, and to promote an entrepreneurial, performance-oriented culture.
They also align the interests of the investment professionals with the
interests of UBS Global AM's clients. Overall compensation can be grouped
into four categories:
- Competitive salary, benchmarked within the market to maintain
competitive compensation opportunities.
- Annual bonus, tied to individual contributions and investment
performance.
- UBS equity awards, promoting company-wide success and employee
retention.
- Additional specialized programs.
BASE SALARY is used to recognize the experience, skills and knowledge that
the investment professionals bring to their roles. Salary levels are
monitored and adjusted periodically in order to remain competitive within the
investment management industry.
ANNUAL BONUSES are strictly and rigorously correlated with performance. As
such, annual incentives can be highly variable, and are based on three
components: 1) the firm's overall business success; 2) the performance of the
respective asset class and/or investment mandate; and 3) an individual's
specific contribution to the firm's results. UBS Global AM strongly believes
that tying bonuses to both long-term (3-year) and shorter-term (1-year)
portfolio performance closely aligns the investment professionals' interests
with those of UBS Global AM's clients.
UBS AG EQUITY. Senior investment professionals, such as Mr. Schillhorn, may
receive a portion of their annual performance-based incentive in the form of
deferred or restricted UBS AG shares or employee stock options. UBS Global AM
believes that this reinforces the critical importance of creating long-term
business value and also serves as an effective retention tool as the equity
shares typically vest over a number of years.
Broader equity share ownership is encouraged for all employees through
"Equity Plus." This long-term incentive program gives employees the
opportunity to purchase UBS stock with after-tax funds from their bonus or
salary. Two UBS stock options are given for each share acquired and held for
two years. UBS Global AM feels this engages its employees as partners in the
firm's success, and helps to maximize its integrated business strategy.
ADDITIONAL PLANS. UBS Global AM offers more executive plans on an ad
hoc basis for the top 2% - 5% of its senior management. These plans are
designed to align individual performance to longer term decision performance
and offer greater compensation potential as the firm's value increases over
time.
As of the date of this SAI, Mr. Schillhorn did not own shares of the Fund.
PORTFOLIO TRANSACTIONS
The Fund purchases portfolio securities from dealers and underwriters
as well as from issuers. Subject to policies established by the Board, UBS
Global AM is responsible for the execution of the Fund's portfolio transactions
and the allocation of brokerage transactions. Securities are usually traded on a
net basis with dealers acting as principal for their own accounts without a
stated commission. Prices paid to dealers in principal transactions generally
include a "spread," which is the difference between the prices at which the
dealer is willing to purchase and sell a specific security at the time. When
securities are purchased directly from an issuer, no commissions or discounts
are paid. When securities are purchased in underwritten offerings, they include
a fixed amount of compensation to the underwriter.
28
For purchases or sales with broker-dealer firms that act as principal,
UBS Global AM seeks best execution. Although UBS Global AM may receive certain
research or execution services in connection with these transactions, it will
not purchase securities at a higher price or sell securities at a lower price
than would otherwise be paid if no weight was attributed to the services
provided by the executing dealer. UBS Global AM may engage in agency
transactions in over-the-counter securities in return for research and execution
services. These transactions are entered into only pursuant to procedures that
are designed to ensure that the transaction (including commissions) is at least
as favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services.
Research services and information received from brokers or dealers are
supplemental to UBS Global AM's own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which the Fund effects securities transactions may be used
by UBS Global AM in advising other funds or accounts and, conversely, research
services furnished to UBS Global AM by brokers or dealers in connection with
other funds or accounts that it advises may be used in advising the Fund.
During the fiscal years ended October 31, 2004, October 31, 2003 and
October 31, 2002, the Fund paid $33,794, $0 and $0, respectively, in
brokerage commissions. Typically, the Fund has not allocated any brokerage
transactions for research, analysis, advice and similar services. None of the
amount of brokerage commissions for the fiscal year ended October 31, 2004
relate to research services or any other soft dollar type services.
Investment decisions for the Fund and for other investment accounts managed
by UBS Global AM are made independently of one another in light of differing
considerations for the various accounts. However, the same investment
decision may occasionally be made for the Fund and one or more accounts. In
those cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the Fund and the other
account(s) as to amount in a manner deemed equitable to the Fund and the
other account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Fund is
concerned, or upon its ability to complete its entire order, in other cases
it is believed that simultaneous transactions and the ability to participate
in volume transactions will benefit the Fund.
CODE OF ETHICS
The Fund and UBS Global AM, the Fund's investment advisor and
administrator, have adopted a code of ethics under rule 17j-1 of the 1940 Act
("Code of Ethics"). The Code of Ethics establishes standards by which certain
personnel covered by the rule may invest in securities that may be purchased or
held by the Fund, but prohibits fraudulent, deceptive or manipulative conduct in
connection with that personal investing.
The Code of Ethics may be reviewed and copied at the Public Reference
Room of the SEC in Washington, DC. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-202-942-8090. The Code of
Ethics is also available on the EDGAR Database on the SEC's Internet site at
www.sec.gov. Copies of this Code of Ethics
29
may be obtained, after paying a duplicating fee, by electronic request to
publicinfo@sec.gov, or by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
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.
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 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. For the fiscal years ended October 31, 2004, October 31, 2003
and October 31, 2002 the Fund's portfolio turnover rates were 140%, 53% and 57%,
respectively.
TAXATION
GENERAL
The following discussion of federal income tax consequences is for
general information only. Prospective investors should consult their tax
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of Shares, as well as the effects thereon of state, local and
foreign tax laws and any proposed tax law changes.
To qualify to be taxed as a regulated investment company ("RIC") under
the Internal Revenue Code of 1986, as amended ("Code"), the Fund must distribute
to its Shareholders for each taxable year at least 90% 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)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, income from certain qualified publicly traded
partnerships and gains from the sale or other disposition of securities or
foreign currencies, or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, US government securities,
securities of other RICs and other securities that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the Fund's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (3) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than US government securities or the securities of
other RICs) of any one issuer or income from certain qualified publicly traded
partnerships. If the Fund failed to qualify to be taxed as a RIC for any taxable
year, it would be taxed as an ordinary corporation on its taxable income for
that year (even if that income was distributed to its Shareholders) and all
distributions out of its earnings and profits would be taxable to its
Shareholders as dividends (that is, ordinary income).
Dividends and other distributions declared by the Fund in October,
November or December of any year and payable to Shareholders of record on a date
in any of those months
30
will be deemed to have been paid by the Fund and received by the Shareholders on
December 31st of that year if the distributions are paid by the Fund during the
following January. Accordingly, those distributions will be taxed to
Shareholders for the year in which that December 31st falls.
If the Fund retains any net capital gain (the excess of net long-term
capital gain over net short-term capital loss), it may designate the retained
amount as undistributed capital gains in a notice to its Shareholders. If the
Fund makes such a designation, it will be required to pay federal income tax on
the undistributed gains ("Fund tax") and each Shareholder subject to federal
income tax (1) will be required to include in income, as long-term capital
gains, his or her proportionate share of the undistributed gains, (2) will be
allowed a credit or refund, as the case may be, for his or her proportionate
share of the Fund tax and (3) will increase the tax basis of his or her Shares
by the difference between the included income and such share of the Fund tax.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Shares) may be eligible
for the dividends received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends the Fund receives from US
corporations. However, dividends received by a corporate Shareholder and
deducted by it pursuant to the dividends received deduction are subject
indirectly to the federal alternative minimum tax. It is not expected that a
significant portion of the Fund's dividends will qualify for this deduction.
If the Fund has both Shares (i.e., common stock) and preferred stock
outstanding, it intends to designate distributions made to each such class in
any year as consisting of no more than each class' proportionate share of
particular types of income based on the total distributions paid to each class
for the year, including distributions out of net capital gain.
Income from investments in foreign securities, and gains realized
thereon, may be subject to foreign withholding or other taxes. Tax conventions
between certain countries and the United States may reduce or eliminate foreign
taxes, however, and many foreign countries do not impose taxes on capital gains
in respect of investments by foreign investors. Shareholders will not be able to
claim any foreign tax credit or deduction with respect to those foreign taxes.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one year period ending on October 31st of that year, plus certain
other amounts. For these purposes, any such income retained by the Fund, and on
which it pays federal income tax, will be treated as having been distributed.
DISTRIBUTIONS
Dividends of investment company taxable income (including net
short-term capital gains) are taxable to Shareholders as ordinary income,
whether paid in cash or invested in Fund Shares. Distributions of investment
company taxable income may be eligible for the corporate dividends-received
deduction to the extent attributable to the Fund's dividend income from US
corporations, and if other applicable requirements are met. However, the Fund
does not expect to derive a material amount of dividend income from US
corporations. Furthermore, the
31
alternative minimum tax applicable to corporations may reduce the benefit of the
dividends-received deduction. Distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses) designated by
the Fund as capital gain dividends are not eligible for the dividends-received
deduction and will generally be taxable to Shareholders as long-term capital
gains, regardless of the length of time the Fund's Shares have been held by a
Shareholder. Net capital gains from assets held for one year or less will be
taxed as ordinary income. Generally, dividends and distributions are taxable to
Shareholders, whether received in cash or reinvested in Shares of 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 will be notified annually as to the
federal tax status of dividends and distributions they receive and any tax
withheld thereon.
Current tax law generally provides for a maximum tax rate for
individual taxpayers of 15% on long-term capital gains and on certain qualifying
dividend income. These rate reductions do not apply to corporate taxpayers. The
Fund will be able to separately designate distributions of any qualifying
long-term capital gains or qualifying dividends earned by the Fund that would be
eligible for the lower maximum rate. A Shareholder would also have to satisfy a
60-day holding period with respect to any distributions of qualifying dividends
in order to obtain the benefit of the lower rate. Distributions from income the
Fund earned by investing in bonds and other debt instruments will not generally
qualify for the lower rates. The Fund does not expect to derive a material
amount of qualified dividend income that would be eligible for the 15% rate.
Dividends, including capital gain dividends, declared in October,
November, or December with a record date in such month and paid during the
following January will be treated as having been paid by the Fund and received
by Shareholders on December 31 of the calendar year in which declared, rather
than the calendar year in which the dividends are actually received.
Distributions by the Fund reduce the net asset value of the Fund Shares. Should
a distribution reduce the net asset value below a Shareholder's cost basis, the
distribution nevertheless may be taxable to the Shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying Shares just prior to a
distribution by the Fund. The price of Shares purchased at that time includes
the amount of the forthcoming distribution, but the distribution will generally
be taxable to them.
ORIGINAL ISSUE DISCOUNT AND MARKET DISCOUNT
Certain debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount that accrues on a debt
security in a given year generally is treated for federal income tax purposes as
interest and, therefore, such income would be subject to the Distribution
Requirements.
If the Fund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is
32
"market discount." If the amount of market discount is more than a DE MINIMIS
amount, a portion of such market discount must be included as ordinary income
(not capital gain) by the Fund in each taxable year in which the Fund owns an
interest in such debt security and receives a principal payment on it. In
particular, the Fund will be required to allocate that principal payment
first to the portion of the market discount on the debt security that has
accrued but has not previously been includable in income. In general, the
amount of market discount that must be included for each period is equal to
the lesser of (i) the amount of market discount accruing during such period
(plus any accrued market discount for prior periods not previously taken into
account) or (ii) the amount of the principal payment with respect to such
period. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining
to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual
compounding of interest. Gain realized on the disposition of a market
discount obligation must be recognized as ordinary interest income (not
capital gain) to the extent of the "accrued market discount."
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation other than a "controlled
foreign corporation" (i.e., a foreign corporation in which, on any day during
its taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "US shareholders," defined as US persons that individually
own, directly, indirectly, or constructively, at least 10% of that voting power)
as to which the Fund is a US shareholder that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of that stock (collectively "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its Shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
Shareholders. If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then, in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain which most likely would have to be distributed by the Fund to
satisfy the Distribution Requirement and avoid imposition of the Excise Tax even
if those earnings and gain are not distributed to the Fund by the qualified
electing fund. In most instances it will be very difficult, if not impossible,
to make this election because of certain requirements for making the election.
The Fund may elect to "mark to market" its stock in any PFIC. "Marking
to market," in this context, means including in ordinary income each taxable
year the excess, if any, of the fair market value of the PFIC's stock over the
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also will be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year end, but only to the extent of any
net mark to market gains with respect to that stock included by the Fund for
prior taxable years. The Fund's adjusted basis in
33
each PFIC's stock with respect to which it makes this election will be adjusted
to reflect the amounts of income included and deductions taken under the
election.
STRATEGIES USING DERIVATIVE INSTRUMENTS
Strategies using derivative instruments, such as selling (writing) and
purchasing options and futures and entering into forward currency contracts,
involve complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the Fund realizes in
connection therewith. These rules also may require the Fund to "mark to market"
(that is, treat as sold for their fair market value) at the end of each taxable
year certain positions in its portfolio, which may cause the Fund to recognize
income and/or gain without receiving cash with which to make distributions
necessary to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax. Gains from the disposition of foreign currencies (except certain
gains that may be excluded by future regulations), and gains from options,
futures and forward currency contracts derived by the Fund with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement.
If the Fund has an "appreciated financial position" generally, an
interest (including an interest through an option, futures or forward currency
contract, or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting
notional principal contract or futures or forward currency contract entered into
by the Fund or a related person with respect to the same or substantially
similar property. In addition, if the appreciated financial position is itself a
short sale or such a contract, acquisition of the underlying property or
substantially similar property will be deemed a constructive sale.
SALE OR OTHER DISPOSITION OF SHARES
Upon the redemption, sale or exchange of his or her Shares, a
Shareholder will realize a taxable gain or loss depending upon his basis in
the Shares. Such gain or loss will be treated as capital gain or loss if the
Shares are capital assets in the Shareholder's hands, which generally may be
eligible for reduced Federal tax rates (for Shareholders who are
individuals), depending on the Shareholder's holding period for the Shares.
Any loss realized on a redemption, sale or exchange will be disallowed to the
extent that the Shares disposed of are replaced (including replacement
through the reinvesting of dividends and capital gain distributions in the
Fund) within a period of 61 days beginning 30 days before and ending 30 days
after the disposition of the Shares. In such a case, the basis of the Shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized
by a Shareholder on the sale of the Fund's Shares held by the Shareholder for
six months or less will be treated for federal income tax purposes as a
long-term capital loss to the extent of any distributions of capital gain
dividends received by the Shareholder with respect to such Shares.
34
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at
a rate of 28% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to Shareholders if (1) the Shareholder
fails to furnish the Fund with the Shareholder's correct taxpayer identification
number or social security number and to make such certifications as the Fund may
require, (2) the IRS notifies the Shareholder or the Fund that the Shareholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect, or (3) when required to do so, the
Shareholder fails to certify that he is not subject to backup withholding. Any
amounts withheld may be credited against the Shareholder's federal income tax
liability.
FOREIGN SHAREHOLDERS
Taxation of a Shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign Shareholder"), depends on whether the income from
the Fund is "effectively connected" with a US trade or business carried on by
such Shareholder.
If the income from the Fund is not effectively connected with a US
trade or business carried on by a foreign Shareholder, ordinary income dividends
(including distributions of any net short-term capital gains) will be subject to
US withholding tax at the rate of 30% (or lower treaty rate) upon the gross
amount of the dividend. Note that the 15% rate of tax applicable to certain
dividends (discussed above) does not apply to dividends paid to foreign
Shareholders. Such a foreign Shareholder would generally be exempt from US
federal income tax on gains realized on the sale of Shares of the Fund, and
distributions of net long-term capital gains that are designated as capital gain
dividends.
Under recently enacted legislation, the Fund is generally able to
designate certain distributions to foreign persons as being derived from
certain net interest income or net short-term capital gains, and such
designated distributions would generally not be subject to US tax
withholding; however, the Fund has decided as of the date of this Statement
of Additional Information not to maintain the detailed information necessary
for such treatment. The new provision would have applied with respect to
taxable years of the Fund beginning after December 31, 2004 and before
January 1, 2008. It should be noted that the provision will not have
eliminated all withholding on distributions by the Fund to foreign investors.
Distributions that are derived from any dividends on corporate stock or from
ordinary income other than US source interest would still be subject to
withholding. Foreign currency gains, foreign source interest and ordinary
income from swaps or investments in PFICs would still be subject to
withholding when distributed to foreign investors.
If the income from the Fund is effectively connected with a US trade
or business carried on by a foreign Shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of Shares of the
Fund will be subject to US federal income tax at the rates applicable to US
citizens or domestic corporations.
35
The tax consequences to a foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign Shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
OTHER TAXES
Distributions also may be subject to state, local and foreign taxes.
This discussion does not purport to deal with all of the tax consequences
applicable to Shareholders. Shareholders are advised to consult their own tax
advisers for details with respect to the particular tax consequences to them of
an investment in the Fund.
ADDITIONAL INFORMATION
SHARE REPURCHASES AND TENDER OFFERS
As discussed in the Prospectus, the Fund's Board of Directors may
tender for Common Stock to reduce or eliminate the discount to net asset value
at which the Common Stock might trade. Even if a tender offer has been made, it
will be the Board's announced policy, which may be changed by the Board, not to
accept tenders or effect repurchases (or, if a tender offer has not been made,
not to initiate a tender offer) if: (1) such transactions, if consummated, would
(a) result in the delisting of the Common Stock from the NYSE (the NYSE having
advised the Fund that it would consider delisting if the aggregate market value
of the outstanding shares is less than $5,000,000, the number of publicly held
shares falls below 600,000 or the number of round-lot holders falls below
1,200), or (b) impair the Fund's status as a RIC (which would eliminate its
eligibility to deduct dividends paid to its stockholders, thus causing its
income to be fully taxed at the corporate level in addition to the taxation of
stockholders on distributions received from the Fund); (2) the Fund would not be
able to liquidate portfolio securities in an orderly manner and consistent with
the Fund's investment objectives and policies in order to repurchase the Common
Stock; or (3) there is, in the Board's judgment, any material (a) legal action
or proceeding instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Fund, (b) suspension of trading or
limitation on prices of securities generally on the NYSE or any foreign exchange
on which portfolio securities of the Fund are traded, (c) declaration of a
banking moratorium by federal, state or foreign authorities or any suspension of
payment by banks in the United States, New York State or foreign countries in
which the Fund invests, (d) limitation affecting the Fund or the issuers of its
portfolio securities imposed by federal, state or foreign authorities on the
extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States or other
countries in which the Fund invests or (f) other events or conditions that would
have a material adverse effect on the Fund or its stockholders if Common Stock
was repurchased. The Board of Directors may modify these conditions in light of
experience.
CUSTODIAN
JP Morgan Chase Co., serves as custodian of the Fund's assets held in
the United States. Rules adopted under the 1940 Act permit the Fund to maintain
its securities and cash in
36
the custody of certain eligible banks and securities depositories. Pursuant
to those rules, the Fund's portfolio of securities and cash, when invested in
securities of foreign countries, is held by its subcustodians in accordance
with the rules of the SEC.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 5 Times Square, New York, New York 10036, serves as
the Fund's independent registered public accounting firm.
LEGAL MATTERS
The law firm of Dechert LLP, 1775 I Street, N.W., Washington, D.C.
20006, counsel to the Fund, has passed upon the legality of the Shares offered
by the Fund's Prospectus. Dechert LLP also acts as counsel to UBS Global AM in
connection with other matters. Willkie Farr & Gallagher, LLP 787 Seventh Avenue,
New York, New York 10019, serves as independent counsel to the Independent
Directors.
FINANCIAL INFORMATION
The Fund's audited financial statements and independent registered
public accounting firm's report thereon, appearing in the Fund's Annual Report
to Shareholders for the period ending October 31, 2004, and the Fund's unaudited
financial statements appearing in the Fund's Semi-Annual Report to Shareholders
for the period ending April 30, 2005 are incorporated by reference in this
Statement of Additional Information. The Fund's Annual and Semi-Annual Reports
to Shareholders are available upon request and free of charge by calling the
Fund at 800-647-1568.
37
`
PART C -- OTHER INFORMATION
Item 25. FINANCIAL STATEMENTS AND EXHIBITS
(1) (a) Included in Part A:
(i) Financial Statements
(b) Included in Part B:
(i) Report of Independent Registered Public Accounting
Firm
(ii) Portfolio of Investments as of October 31, 2004 (1)
(iii) Statement of Assets and Liabilities as of October 31,
2004 (1)
(iv) Statement of Operations as of October 31, 2004 (1)
(v) Statement of Changes in Net Assets for the year ended
October 31, 2004 (1)
(vi) Statement of Cash Flows for the year ended October
31, 2004 (1)
(vii) Notes to Financial Statements (1)
(viii) Portfolio of Investments at April 30, 2005 (2)
(ix) Statement of Assets and Liabilities at April 30,
2005 (2)
(x) Statement of Changes in Net Assets for the six
months ended April 30, 2005 (2)
(xi) Notes to Financial Statements (2)
(2) (a) (i) Articles of Incorporation (3)
(ii) Articles of Amendments (4)
(b) (i) Bylaws (5)
(ii) Amendments to Bylaws (6)
(iii) Amended and Restated Bylaws (7)
(iv) Amendment to Bylaws (8)
(c) None
(d) (i) Form of Notice Guaranteed Delivery (filed herewith)
(ii) Form of Exercise Form (filed herewith)
(e) Dividend Reinvestment Plan (9)
(f) None
(g) (i) Investment Advisory and Administration Contract (10)
(ii) Amendment to Investment Advisory and
Administration Contract (7)
(h) (i) Underwriting Agreement (11)
(ii) Master Selected Dealer Agreement (12)
(i) None
(j) Global Custody Agreement between Chase Manhattan Bank and
Global High Income Dollar Fund Inc. (dated July 1, 2001) (7).
(k) (i) Transfer Agency Agreement (13)
(ii) Notice of Assignment of Transfer Agency
Agreement (14)
(iii) Information Agent Agreement between Registrant and
The Altman Group, Inc. (filed herewith)
(l) Opinion and Consent of Counsel (filed herewith)
(m) None
(n) Consent of Independent Auditors (filed herewith)
(o) None
(p) Not Applicable
(q) None
(r) Code of Ethics of Registrant and UBS Global Asset Management
(US) Inc. (15)
(s) (i) Powers of Attorney for Messrs. Armstrong, Beaubien,
Burt, Feldberg and White (7)
(ii) Power of Attorney for Mr. Disbrow (7)
(iii) Power of Attorney for Mr. Beck (7)
----------
(1) Incorporated by reference from Registrant's Annual Report to
Shareholders for the period ending October 31, 2004, filed December 29,
2004.
(2) Incorporated by reference from Registrant's Semi-Annual Report to
Shareholders for the period ending April 30, 2005, filed on
Form N-CSR on July 11, 2005.
(3) Incorporated by reference to exhibit 1(a) from Registrant's initial
registration statement on Form N-2, SEC File No. 33-64916, filed on
June 23, 1993.
(4) Incorporated by reference to exhibit 1(b) from Registrant's initial
registration statement on Form N-2, SEC File No. 33-64916, filed on
June 23, 1993.
(5) Incorporated by reference to exhibit 2(b)(i) from Post-Effective
Amendment No. 4 to the Registrant's registration statement on Form
N-2, SEC File No. 33-64916, filed on January 4, 1996.
(6) Incorporated by reference to exhibit 2(b)(ii) from Post-Effective
Amendment No. 4 to the Registrant's registration statement on Form
N-2, SEC File No. 33-64916, filed on January 4, 1996.
(7) Incorporated by reference from Registrant's registration statement
on Form N-2, SEC File No. 333-127896, filed on August 26, 2005.
(8) Incorporated by reference to exhibit 2(b)(iii) from Managed High
Yield Plus Fund Inc.'s registration statement on Form N-2, SEC File
No. 333-120645, filed on November 19, 2004.
(9) Incorporated by reference to exhibit 5 from Pre-Effective Amendment
No. 2 to the Registrant's registration statement on Form N-2, SEC File
No. 33-64916, filed on September 30, 1993.
(10) Incorporated by reference to exhibit g from Post-Effective Amendment
No. 2 to the Registrant's registration statement on Form N-2, SEC File
No. 33-64916, filed on November 23, 1994.
(11) Incorporated by reference to exhibit h from Post-Effective Amendment
No. 2 to the Registrant's registration statement on Form N-2, SEC File
No. 33-64916, filed on November 23, 1994, and a related document,
included as exhibit 8(b) to Pre-Effective Amendment No. 2 to the
Registrant's registration statement on Form N-2, SEC File No. 33-64916,
filed September 30, 1993.
(12) Incorporated by reference to exhibit g from Post-Effective Amendment
No. 2 to the Registrant's registration statement on Form N-2, SEC File
No. 33-64916, filed on November 23, 1994.
(13) Incorporated by reference to exhibit k from Post-Effective Amendment
No. 2 to Registrant's registration statement on Form N-2, SEC File
No. 33-64916, filed on November 23, 1994.
(14) Incorporated by reference to exhibit 2(k)(ii) from Managed High Yield
Plus Fund Inc.'s registration statement on Form N-2, SEC File No.
333-120645, filed on November 19, 2004.
(15) Incorporated by reference to exhibit 15 from Post-Effective Amendment
No. 11 to the registration statement of UBS Index Trust on Form N-2,
SEC File No. 333-27917, filed on July 28, 2005.
Item 26. MARKETING ARRANGEMENTS
Not applicable.
Item 27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connection
with the offering described in this Registration Statement:
Registration Fees $ 17,000
New York Stock Exchange Fees 30,000
Printing and Engraving Expenses 75,000
Fees and expenses of qualifications under
state securities laws (including fees of counsel) 0
Accounting Fees and Expenses 30,000
Legal Fees 150,000
Information Agent Fees 31,000
Subscription Agent Fees 35,000
Miscellaneous Expenses 21,000
TOTAL $389,000
========
Item 28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
Item 29. NUMBER OF HOLDERS OF SECURITIES
TITLE OF CLASS NUMBER OF RECORD SHAREHOLDERS AS
OF OCTOBER 24, 2005
-------------- ----------------------------------
Common Stock, par value
$0.001 per share 475
Item 30. INDEMNIFICATION
Incorporated by reference to Item 29 of Part C from Pre-Effective Amendment
No. 2 to the Registrant's registration statement on Form N-2, SEC File
No. 33-64916, filed on September 30, 1993.
Item 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the disclosure under the caption "Management of the
Fund" in the Prospectus.
UBS Global AM , a Delaware corporation, is a registered investment adviser
and is a wholly owned subsidiary of UBS AG, investment advisory and financial
services business. Information as to the officers and directors of UBS Global AM
is included in its Form ADV, as filed with the Securities and Exchange
Commission (registration number 801-13219) and is incorporated herein by
reference.
Item 32. LOCATION OF ACCOUNTS AND RECORDS
The books and other documents required by (i) paragraphs (b)(4), (c) and
(d) of Rule 31a-1 and (ii) paragraphs (a)(3), (a)(4), (a)(5), (c) and (e) of
Rule 31a-2 under the Investment Company Act of 1940 are maintained in the
physical possession of UBS Global AM, at 51 West 52nd Street, New York, New York
10019-6114. All other accounts, books and documents required by Rule 31a-1 are
maintained in the physical possession of Registrant's transfer agent and
custodian.
Item 33. MANAGEMENT SERVICES
None.
Item 34. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To suspend the offering of its shares until it amends its Prospectus if
(i) subsequent to the effective date of this Registration Statement, the
net asset value per share declines more than 10% from its net asset value
per share as of the effective date of the Registration Statement, or (ii)
the net asset value increases to an amount greater than its net proceeds as
stated in the Prospectus.
(2) Not applicable
(3) Not applicable.
(4) Not applicable.
(5) (a) That for the purpose of determining any liability under the
Securities Act of 1933 , the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Fund under
Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of
this Registration Statement as of the time it was declared effective; and
(b) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(6) To send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of a written or oral
request, any Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York, on the 28th day of
October, 2005.
GLOBAL HIGH INCOME DOLLAR FUND INC.
By: /s/ Keith A. Weller
--------------------------
Keith A. Weller
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
Director October 28, 2005
-------------------------------------
Margo N. Alexander
/s/ Richard Q. Armstrong Director and Chairman of the October 28, 2005
------------------------------------- Board of Directors
Richard Q. Armstrong*
/s/ David J. Beaubien Director October 28, 2005
-------------------------------------
David J. Beaubien*
/s/ Richard R. Burt Director October 28, 2005
-------------------------------------
Richard R. Burt*
/s/ Thomas Disbrow Vice President and Treasurer October 28, 2005
-------------------------------------
Thomas Disbrow*
/s/ Meyer Feldberg Director October 28, 2005
-------------------------------------
Meyer Feldberg*
/s/ William D. White Director October 28, 2005
-------------------------------------
William D. White*
/s/ W. Douglas Beck President October 28, 2005
-------------------------------------
W. Douglas Beck*
*Signature affixed by Stephen H. Bier pursuant to Powers of Attorney dated
August 17, 2005 and August 24, 2005 and incorporated by reference from the
Registrant's registration statement on Form N-2, SEC File No. 333-127896,
filed on August 26, 2005.
Global High Income Dollar Fund Inc.
Exhibit Index
2(d)(i) Form of Notice of Guaranteed Delivery
2(d)(ii) Form of Exercise Form
2(k)(iii) Information Agent Agreement between Registrant and The Altman
Group, Inc.
2(l) Opinion and Consent of Counsel
2(n) Consent of Independent Registered Public Accounting Firm