As filed with the Securities and Exchange Commission on October 8, 2002.
Investment Company Act File No. 811-06342
Securities Act File No. 333-_______________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
[X] Registration Statement Under the Securities Act of 1933
[_] Pre-effective Amendment No. ____
[_] Post-effective Amendment No. ____
[X] Registration Statement Under the Investment Company Act of 1940
[X] Amendment No. 7
ABERDEEN GLOBAL INCOME FUND, INC.
(Exact name of Registrant as Specified in Charter)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Registrant's telephone number, including Area Code: (609) 282-4600
Beverley Hendry
300 Las Olas Place
300 S.E. 2/nd/ Street
Suite 820
Ft. Lauderdale, FL 33301
(Name and Address of Agent for Service)
Copies to:
Thomas A. Hale, Esquire Sander M. Bieber, Esquire
Skadden, Arps, Slate, Meagher & Flom LLP Dechert
333 West Wacker Drive 1775 Eye Street, N.W.
Chicago, IL 60606 Washington, D.C. 20006
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box....[_]
It is proposed that this filing will become effective (check appropriate box)
[_] when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum
Title of Securities Amount Being Offering Price Per Proposed Maximum Amount of
Being Registered Registered Unit/1/ Offering Price Registration Fee
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Common Stock 100,000 $ 10.07 $ 1,007,000 $ 92.64
($.01 par value)
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(1) Estimated pursuant to Rule 457(c) on the basis of market value per share on
October 3, 2002.
The Registrant hereby amends this Registration Statement under the Securities
Act of 1933 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 the provisions of Section 8(a) of the Securities Act of 1933 or
until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a), may determine.
SUBJECT TO COMPLETION - PRELIMINARY PROSPECTUS DATED ________, 2002
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.
PROSPECTUS
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ABERDEEN GLOBAL INCOME FUND, INC.
[# of Shares] Shares of Common Stock
Issuable Upon Exercise of Transferable Rights
to Subscribe for Such Shares of Common Stock
New York Stock Exchange Symbol: FCO
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Aberdeen Global Income Fund, Inc. ("Fund") will issue to its common stockholders
("Stockholders") of record as of the close of business on [Record Date] ("Record
Date"), transferable rights ("Rights") entitling the holders thereof to
subscribe for up to an aggregate of [# of shares] new shares ("Shares") of the
Fund's common stock, par value $0.001 ("Common Stock"), at the rate of one share
of Common Stock for every __ Rights held ("Offer"). Stockholders of record on
the Record Date ("Record Date Stockholders") will receive one transferable Right
for each share of Common Stock held as of the Record Date. The number of Rights
issued to a Record Date Stockholder will be rounded up to the nearest number of
Rights evenly divisible by __. In the case of shares of Common Stock held of
record by Cede & Co. ("Cede"), as nominee for the Depository Trust Company
("DTC"), or any other depository or nominee, the number of Rights issued to Cede
or such other depository or nominee will be adjusted to permit rounding up (to
the nearest number of Rights evenly divisible by ___) of the Rights to be
received by beneficial owners for whom it is the holder of record only if Cede
or such other depository or nominee provides to the Fund on or before the close
of business on ______, 2002 a written representation of the number of Rights
required for such rounding. Record Date Stockholders who fully exercise their
Rights may purchase the new Shares not acquired by other Record Date
Stockholders in this Offer, subject to certain limitations and subject to
allotment ("Over-Subscription Privilege"). Fractional shares will not be issued
upon the exercise of Rights. See "The Offer."
The Fund's Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "FCO." The Rights are transferable and will be admitted for trading
on the NYSE under the symbol "FCO.RT" during the course of the Offer. The
subscription price per share will be $________ ("Subscription Price"). THE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [EXPIRATION DATE], UNLESS
EXTENDED ("EXPIRATION DATE"). For additional information regarding the Offer,
please call Georgeson Shareholder Communications, Inc. ("Information Agent") at
(866) 206-4932.
The Fund is a non-diversified, closed-end management investment company. The
Fund's investment objective is to provide high current income by investing
primarily in fixed-income securities denominated in the Australian dollar, the
Canadian dollar, the New Zealand dollar and the United Kingdom Pound Sterling or
any successor currency ("Commonwealth Currencies"). As a secondary investment
objective, the Fund seeks capital appreciation, but only when consistent with
its principal investment objective. In March 1999, holders of the Fund's Common
Stock and preferred stock approved a series of amendments to the Fund's
principal investment objective, investment policies and investment restrictions
to enable the Fund to invest up to 35% of its total assets in Global Debt
Securities. See "Investment Objective and Policies" and "Investment
Restrictions." Investment in the Fund involves certain risks and special
considerations, including risks associated with currency fluctuations and the
Fund's leveraged capital structure. See "Risk Factors and Special
Considerations." The Fund's Investment Manager is Aberdeen Asset Managers (C.I.)
Limited ("Investment Manager"), an affiliate of Aberdeen Asset Management
Limited, the Fund's Investment Adviser ("Investment Adviser"). Princeton
Administrators, L.P. acts as the Fund's administrator ("Administrator"). The
address of the Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and
its telephone number is (800)282-2000.
The Fund announced the Offer after the close of trading on the NYSE on _______,
2002. The net asset value ("NAV") per share of Common Stock at the close of
business on _________, 2002 [(the last trading date on which the Fund publicly
reported its NAV prior to the announcement)] and on ____________ [(the last
trading date on which the Fund publicly reported its NAV prior to the date of
this Prospectus)] was $_____ and $_____, respectively, and the last reported
sales price per share of the Fund's Common Stock on the NYSE on those dates was
$_____ and $______, respectively.
This Prospectus sets forth concisely the information about the Fund that a
Stockholder ought to know before investing. Additional information about the
Fund has been filed with the Securities and Exchange Commission ("SEC") and is
available upon written or oral request without charge. The SEC maintains a
website (http://www.sec.gov) that contains material incorporated by reference
and other information regarding the Fund.
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND TO RETAIN IT FOR FUTURE
REFERENCE.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
===========================================================================================
Estimated Estimated Proceeds
Subscription Price Sales Load(1) to Fund or Other Persons(2)
-------------------------------------------------------------------------------------------
Per Share ......... $____ $____ $____
-------------------------------------------------------------------------------------------
Total Maximum ..... $_________ $_________ $_________
===========================================================================================
Footnotes set forth on next page
Dealer Managers
[Record Date+2]
(continued from previous page)
-------------------------
(1) In connection with the Offer, the Fund has agreed to pay [Dealer
Managers] ("Dealer Managers") a fee for their financial advisory,
marketing and soliciting services equal to an aggregate of 3.75% of
the aggregate Subscription Price for the Shares issued pursuant to the
Offer and to reimburse the Dealer Managers for out-of-pocket expenses
up to $50,000. The Dealer Managers will reallow to certain
broker-dealers in the selling group formed by the Dealer Managers
selling fees of 2.50% of the Subscription Price for Shares issued
pursuant to the Offer as a result of their selling efforts. In
addition, the Dealer Managers will reallow to certain soliciting
dealers that have solicited the exercise of Rights a solicitation fee
of 0.50% of the Subscription Price for Shares issued pursuant to the
Offer as a result of their soliciting efforts, subject to a maximum.
See "Distribution Arrangements." These fees and expense reimbursement
will be borne by the Fund and indirectly by all of the Fund's
Stockholders, including those who do not exercise their Rights. The
Fund and the Investment Manager have agreed to indemnify the Dealer
Managers against certain liabilities including liabilities under the
Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended.
(2) Before deduction of expenses incurred by the Fund, estimated to be
$___________, including $50,000 to be paid to the Dealer Managers
for reimbursement of their expenses.
As a result of the terms of the Offer, assuming that Rights are
exercised, Stockholders who do not fully exercise their Rights will, upon the
completion of the Offer, own a smaller proportional interest in the Fund than
they owned prior to the Offer. In addition, because the Subscription Price may
be less than the NAV per share at the expiration of the Offer and because the
Fund will incur expenses in connection with the Offer, the Offer is likely to
result in a dilution of the NAV per share for all existing Stockholders. Such
dilution may disproportionately affect non-exercising Stockholders. If the
Subscription Price were to be substantially less than the NAV per share at the
expiration of the Offer, such dilution could be substantial. The Offer includes
the Over-Subscription Privilege that may also result in substantial dilution of
NAV per share. See "The Offer" and "Risk Factors and Special Considerations."
In connection with this Offer, the Dealer Managers may effect
transactions which stabilize or maintain the market price of the Rights and the
shares of Common Stock of the Fund at levels above those which might otherwise
prevail in the open market. Such transactions may be effected on the NYSE, on
Nasdaq or otherwise. Such stabilizing, if commenced, may be discontinued at any
time.
Prior to the expiration of the Offer, the Dealer Managers may offer
shares of Common Stock, including Shares acquired through purchasing and
exercising the Rights, at prices it sets. The Dealer Managers may realize
profits or losses independent of any fees described in this Prospectus.
Unless otherwise specified, all references to currency in this
Prospectus may be abbreviated throughout this Prospectus as shown in the table
below. On [Record Date], the noon buying rates in New York City for cable
transfers payable in each currency per U.S. dollar, as certified for customs
purposes by the Federal Reserve Bank of New York, were as shown in the table
below. See "Risk Factors and Special Considerations - Currency Exchange Rate
Fluctuations."
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Currency Abbreviations Currency per US$
----------------------------------------------------------------------------------------
United States Dollar "U.S. dollar," "dollar," "US$" or "$" N/A
----------------------------------------------------------------------------------------
Australian Dollar "A$" A$_____
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New Zealand Dollar "NZ$" NZ$_____
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Canadian Dollar "C$" C$_____
----------------------------------------------------------------------------------------
British Pound "(pound)" or "STG" STG_____
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South Korean Won "W" or "KRW" KRW_____
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Thai Baht "B" or "THB" THB_____
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Philippines Peso "P" or "PHP" PHP_____
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Malaysian Ringgit "R" or "MYR" MYR_____
----------------------------------------------------------------------------------------
Singapore Dollar "S$" or "SGD" SGD_____
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere or incorporated by reference in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes that the Rights issued are all exercised. Also, unless otherwise
indicated, references in the Prospectus to "Stockholders" refer only to holders
of the Fund's Common Stock.
THE OFFER AT A GLANCE
The Offer The Fund is issuing to Stockholders of record
on [Record Date] ("Record Date Stockholders")
one transferable Right for each share of Common
Stock held. A Record Date Stockholder's right
to acquire, during the Subscription Period at
the Subscription Price, one Share for every __
Rights held is hereinafter referred to as the
"Primary Subscription." The number of Rights to
be issued to a Record Date Stockholder on the
Record Date will be rounded up to the nearest
number of Rights evenly divisible by __.
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
will not be entitled to the distribution to be
declared to Stockholders of record on [month
day, year] which is payable in [month year].
Whether a Stockholder is entitled to the
distribution to be declared to Stockholders of
record on [month day, year] which is payable in
[month year] will depend on the date Shares are
actually issued to the Stockholder.
Subscription Price The Subscription Price will be $____ per Share.
Over-Subscription Privilege Record Date Stockholders who fully exercise all
Rights issued to them (other than those Rights
which cannot be exercised because they
represent the right to acquire less than one
Share) are entitled to subscribe for additional
Shares which were not subscribed for by other
Record Date Stockholders. If sufficient Shares
are available, all Record Date Stockholders'
Over-Subscription requests will be honored in
full. If these requests for Shares exceed the
Shares available, the available Shares will be
allocated pro rata among Record Date
Stockholders who over-subscribe based on the
number of Rights originally issued to them by
the Fund.
Purpose of the Offer In March 1999, holders of the Fund's Common
Stock and preferred stock approved a series of
proposals allowing the Fund, among other
things, to:
. invest up to 35% of its total assets in
Global Debt Securities;
. reduce the average quality of its portfolio
to A or better;
. invest up to 15% of its total assets in
debt securities rated, or judged by the
Investment Manager to be, below investment
grade at the time of investment;
. use derivatives to manage currency and
interest rate risk, as well as replicate or
substitute for physical securities, such as
bonds, bills, cash and foreign exchange
securities (together, "Physical
Securities"); and
. invest in the securities of other
investment companies that themselves invest
primarily in fixed-income securities.
The term "Global Debt Securities" includes
securities of issuers located in, or securities
denominated in the currency of, countries other
than Australia, Canada, New Zealand or the
United Kingdom (together, the "Commonwealth
Countries"). Global Debt Securities include (1)
securities of Developed Market and/or Emerging
Market issuers, including securities issued by
Developed Market or
1
Emerging Market governmental entities, as well
as by banks, companies and other entities which
are located in Developed Market or Emerging
Market countries, whether or not denominated in
the currency of the Developed Market or Emerging
Market country, and (2) debt securities of other
issuers, denominated in, or linked to, the
currency of a Developed Market or Emerging
Market country, including securities issued by
supranational issuers, such as The World Bank,
and derivative debt securities that replicate,
or substitute for, the currency of a Developed
Market or Emerging Market country. "Developed
Markets" are those countries contained in the
Salomon Smith Barney World Government Bond
Index, excluding the Commonwealth Countries.
"Emerging Markets" are those countries that are
not Developed Markets or Commonwealth Countries.
The strategy of investing up to 35% of the
Fund's total assets was proposed to be
implemented in two phases. The first phase, to
be implemented immediately following the March
1999 stockholders meeting, involved the
immediate investment of up to 20% of the Fund's
total assets in Asian debt markets which the
Investment Manager and Investment Adviser
believed represented the most attractive sector
at the time because the reward was believed to
be commensurate with the risk. The initial Asian
markets approved by the Board included China,
Hong Kong, India, Indonesia, Japan, Malaysia,
the Philippines, Singapore, South Korea, Taiwan
and Thailand. Throughout this prospectus, unless
the context requires otherwise, the term "Asian
debt securities" will be used to refer to (1)
securities of issuers in China, Hong Kong,
India, Indonesia, Japan, Malaysia, the
Philippines, Singapore, South Korea, Taiwan and
Thailand, as well as any other Asian country
approved by the Board of Directors from time to
time (each an "Asian Country" and, together, the
"Asian Countries"), including securities issued
by governmental entities in the Asian Countries,
as well as by banks, companies and other
entities which are located in the Asian
Countries, whether or not denominated in the
currency of the Asian Country, and (2) debt
securities of other issuers, denominated in, or
linked to, the currency of an Asian Country,
including securities issued by supranational
issuers, such as The World Bank, and derivative
debt securities that replicate, or substitute
for, the currency of an Asian Country.
On September 3, 2001, the Board of Directors of
the Fund authorized the Investment Manager, in
its discretion, to implement the second phase of
the global investment strategy which was to
include investments in global markets beyond
Asia and the Commonwealth Countries.
Accordingly, the Fund may now invest up to 35%
of its total assets in Global Debt Securities,
including securities from global debt markets
outside of Asia, with a view toward enhancing
yield. As of July 31, 2002, 12.2% of the Fund's
total assets were held in Global Debt
Securities, and of that amount 64.8% (or 7.9% of
the Fund's total assets) was held in Asian debt
securities. The Fund's ability to increase its
investment in global markets has remained
constrained by the potential realization of
foreign exchange losses.
The net proceeds of this Offer will be used to
further implement this investment flexibility
and are intended to enable the Fund to increase
its investments in Global Debt Securities and to
increase the Fund's net investment income above
the current level by taking increased advantage
of the relatively high level of interest rates
currently available in non-Commonwealth
Countries. By using the proceeds of this Offer
rather than reallocating assets currently in its
portfolio, the Fund would not necessarily have
to realize the substantial foreign exchange
losses that might otherwise be realized if the
portfolio were internally restructured.
Investment in global markets beyond the
Commonwealth Countries and Asia will allow the
Fund to experience the benefits of
diversification. Further investment in Global
Debt Securities will, however, expose the Fund
to greater interest rate risk,
2
credit risk, political and economic risk and
liquidity risk, than the Fund has been exposed to
in the past, particularly in light of the
potential volatility in global currency and bond
markets. To the extent that further global
investments are made in local currency denominated
debt securities, the Fund will also be exposed to
greater foreign exchange risk. However, to the
extent that further global investments are U.S.
dollar-denominated, the foreign exchange risk to
which the Fund's portfolio is exposed will be
mitigated. Also, as a consequence of the Fund's
increased investment in Global Debt Securities,
the overall credit quality of the securities in
the Fund's portfolio may be reduced.
The Investment Manager and Investment Adviser
believe that an increase in the size of the Fund
should result in an incidental modest reduction in
the Fund's expense ratio, which would be of
long-term benefit to Stockholders. There can be no
assurance that the Offer will be successful or
that by increasing the size of the Fund, the
Fund's aggregate expenses and, correspondingly,
its expense ratio, will be lowered.
Sale of Rights The rights are transferable until the expiration
date of the offer. The rights will be listed for
trading on the NYSE under the symbol "FCO.RT"
during the course of the offering. The Fund will
use its best efforts to ensure that an adequate
trading market for the rights will exist. No
assurance can be given that a market for the
rights will develop. Trading in the rights on the
NYSE may be conducted until the close of trading
on the NYSE on the last business day prior to the
expiration date of the offer.
Use of Proceeds The Investment Manager and Investment Adviser
anticipate that investment of the net proceeds of
the Offer in Global Debt Securities, in accordance
with the Fund's investment objective and policies,
will take approximately one to four months from
their receipt by the Fund, depending on market
conditions and the availability of appropriate
securities. See "Use of Proceeds."
How to Obtain Subscription . Contact your bank, broker or nominee, or
Information
. Contact the Information Agent toll-free at (800)
____-_____, Ext. ____ or call collect (____)
_____-______.
How to Subscribe . Deliver a completed Subscription Certificate and
payment to the Subscription Agent by the Expiration
Date, or
. If your shares are held in a brokerage or bank
account, have your broker or bank deliver a Notice
of Guaranteed Delivery to the Subscription Agent
by the Expiration Date.
Subscription Agent [name]
3
IMPORTANT DATES TO REMEMBER
Record Date ........................................................... [Record Date]
Subscription Period ................................................... [Start Subscription Period] -
[Expiration Date]
Expiration Date ....................................................... [Expiration Date]*
Deadline for Subscription Certificates and Payment for Shares+ ........ [Payment Date]*
Deadline for Notice of Guaranteed Delivery+ ........................... [Payment Date]*
Deadline for payment pursuant to Notice of Guaranteed Delivery ........ [Notice of Guar. Deliv. Date]*
Confirmation Mailed to Exercising Rights Holders ...................... [Confirmation Date]*
* Unless the Offer is extended.
+ A person exercising rights must deliver either (i) a Subscription Certificate
and payment for Shares or (ii) a Notice of Guaranteed Delivery by [Payment
Date], unless the Offer is extended.
THE FUND AT A GLANCE
The Fund The Fund is a non-diversified, closed-end
management investment company organized as a
Maryland corporation. As of the Record Date, the
Fund's NAV per share was $____.
NYSE Listed As of the Record Date, the Fund had
___________ shares of Common Stock, par value
$0.001, outstanding. The Fund's Common Stock is
traded on the NYSE under the symbol "FCO." As of
the Record Date, the last reported sales price
of a share of the Fund was $____. The Rights are
transferable and, therefore, will be admitted
for trading on the NYSE under the symbol
"FCO.RT" during the course of the Offer.
Stock Repurchase Program The Fund's shares have traded in the market below,
at and above NAV since the commencement of the
Fund's operations. However, it is frequently the
case that Fund shares trade at a discount to net
asset value. In an effort to minimize the spread
between market value and net asset value that may
otherwise exist, on March 1, 2001, the Board of
Directors approved a stock repurchase program. The
stock repurchase program allows the Fund to
repurchase up to 10% of its outstanding Common
Stock in the open market during any 12-month
period, if and when the discount to net asset value
is at least 10%. When the Fund repurchases its
shares for a price below their net asset value, the
net asset value of the remaining outstanding shares
will be enhanced. This may or may not affect the
market price of the shares. Acquisitions of shares
by the Fund may increase the expense ratio,
increase interest expense and increase portfolio
turnover. Through July 31, 2002, there have been no
share repurchases through this program. For a
discussion of the Fund's historic discount/premium
to net asset value, see "The Fund - Description of
Common Stock
Preferred Stock As of the Record Date, the Fund had 1,200 shares of
Auction Market Preferred Stock, par value $0.001
("Preferred Stock"), outstanding. The Preferred
Stock has an aggregate liquidation value of $30
million. See "The Fund - Description of Preferred
Stock."
Holders of Common Stock have generally benefited
from the Fund's issuance of the Preferred Stock
which commenced in 1992. Since the fiscal quarter
beginning August 1, 1997, there have been periods
during which the shrinking yield differential
between rates available in the Commonwealth
Countries and rates available in the U.S., combined
with the depreciation of the Commonwealth
Currencies have resulted in the Preferred Stock
having a negative impact on the total return to
holders of Common Stock. During the 12 months to
July 31, 2002, the key investment trend was an end
to the unilateral strength of the U.S. dollar.
4
With U.S. interest rates at historic lows, the
differential between the cost of the Preferred Stock
and the rates at which the Fund invests has been
positive in recent months. Offsetting these impacts
slightly have been capital losses as bond yields have
risen in line with signs of global recovery. The
proposed investment of a more significant percentage
of the Fund's total assets in higher yielding Global
Debt Securities is expected to increase the Fund's
net investment income above the current level by
taking increased advantage of the relatively high
level of interest rates currently available in global
debt markets compared with interest rates prevailing
in the Commonwealth Countries. See "The Offer -
Purpose of the Offer."
Investment Objective The Fund's investment objective is to provide high
current income by investing primarily in fixed-income
securities denominated in the Commonwealth
Currencies. As a secondary investment objective, the
Fund seeks capital appreciation, but only when
consistent with its principal investment objective.
For as long as the name of the Fund remains Aberdeen
Global Income Fund, Inc., it shall be the policy of
the Fund normally to invest at least 80% of its net
assets, plus the amount of any borrowings for
investment purposes, in debt securities. This 80%
investment policy is a non-fundamental policy of the
Fund and, may be changed by the Board of Directors
upon 60 days' prior written notice to stockholders.
Portfolio Structure In March 1999, the holders of the Fund's Common Stock
and Preferred Stock approved a set of proposals that
redefined the minimum percentage of the Fund's total
assets that must be invested in debt securities
denominated in the Commonwealth Currencies and
allowed the Fund to invest the balance of its total
assets (i.e., up to 35% of the Fund's total assets)
in Global Debt Securities. As a result, except in
anticipation of dividend or other payments to be made
in U.S. dollars, it is expected that normally at
least 65% of the Fund's total assets will be invested
in a portfolio of debt securities denominated in the
Commonwealth Currencies. The Fund will, under normal
circumstances, invest in debt securities denominated
in at least three of these currencies and will not
hold more than 50% of its assets in any one
Commonwealth Currency.
Global Debt Securities include (1) securities of
Developed Market and/or Emerging Market issuers,
including securities issued by Developed Market or
Emerging Market governmental entities, as well as by
banks, companies and other entities which are located
in Developed Market or Emerging Market countries,
whether or not denominated in the currency of the
Developed Market or Emerging Market country, and (2)
securities of other issuers, denominated in, or
linked to, the currency of a Developed Market or
Emerging Market country, including securities issued
by supranational issuers, such as The World Bank, and
derivative debt securities that replicate, or
substitute for, the currency of a Developed Market or
Emerging Market country. The maximum exposure to any
one Developed Market country or currency is limited
to 25% of the Fund's total assets. The maximum
exposure to any Emerging Market country or currency
is limited to 15% of the Fund's total assets.
Investment Guidelines The Fund may use derivatives with respect to the
Global Debt Securities portion of its portfolio to
manage currency and interest rate risk and to
replicate or substitute for Physical Securities. The
Fund may also use derivatives with respect to its
investments denominated in Commonwealth Currencies to
manage interest rate risk through investing in
exchange-traded interest rate derivatives.
Subject to the limitations set forth in Section 12(d)
of the Investment Company Act of 1940, as amended
("1940 Act"), the Fund may invest up to 10% of its
total assets in equity securities issued by other
investment companies whose securities are registered
under the 1940 Act and whose investment objective is
to invest primarily in fixed-income securities.
The market value weighted average of the Fund's
investments (or the issuers of those investments)
will be rated not less than A2 by Moody's Investors
Service, Inc. ("Moody's"), or A by Standard & Poor's
Rating Service, a division of the McGraw Hill Company
("S&P"), or comparably rated by another appropriate
nationally or
5
internationally recognized rating agency, or, if
unrated, judged by the Investment Manager to be of
equivalent quality. Up to 15% of the Fund's
investments (or the issuers of those investments) may
be rated below investment grade at the time of
investment; that is, rated below Baa3 by Moody's or
BBB- by S&P, or comparably rated by another
appropriate nationally or internationally recognized
rating agency, or if unrated, judged by the
Investment Manager to be of equivalent quality. All
of the Fund's investments (or the issuers of those
investments) must be rated, at the time of
investment, B3 or better by Moody's, or B- or better
by S&P, or comparably rated by another appropriate
nationally or internationally recognized rating
agency, or if unrated, judged by the Investment
Manager to be of equivalent quality.
The Fund will not concentrate investments in any one
industry except that the Fund will concentrate, under
normal market conditions, more than 25% of its assets
in debt securities issued or guaranteed by the
governments, territories, provinces and states of
Australia, Canada, New Zealand and the United Kingdom
taken as a group (and their instrumentalities and
agencies, including government-owned entities). The
Fund believes it is appropriate to treat all of the
governments of the four Commonwealth Countries as a
separate industry or group of related industries
because of the commonality of economic and political
characteristics and risk levels among the four
Commonwealth Countries, including similar
constitutional, legal and financial systems.
During periods when, in the Investment Manager's
judgment, changes in the markets of Australia,
Canada, New Zealand or the United Kingdom or other
economic conditions warrant, or to meet liquidity or
distribution requirements, the Fund may invest
without limit in U.S. Government securities and
short-term debt obligations of U.S. banks and
corporations rated not less than Aa or Prime 2 by
Moody's or AA or A-2 by S&P for temporary defensive
purposes. Although P-2 and A-2 ratings denote issuers
with a strong (Moody's) or satisfactory (S&P) ability
to repay short-term debt in a timely manner, the
relative degree of safety is not as high as the very
highest rating categories. In addition, the Fund may
enter into repurchase agreements and lending
agreements involving these securities.
Distributions The Fund pays distributions monthly out of current
income supplemented by realized capital gains and, to
the extent necessary, return of paid-in capital. The
current monthly cash distribution is U.S. 6 cents per
share of Common Stock. For the current fiscal year,
the distributions to date have exceeded net
investment income and realized capital gains.
However, under United States tax accounting rules,
the amount of distributable income for each fiscal
period depends on the actual exchange rates during
the entire year between the U.S. dollar and the
currencies in which Fund assets are denominated and
on the aggregate gains and losses realized by the
Fund during the entire year. Therefore, the exact
amount of distributable income for each fiscal year
can only be determined as of the end of the Fund's
fiscal year, October 31st. These monthly
distributions may be reinvested in additional full
and fractional shares of Common Stock through the
Fund's Dividend Reinvestment and Cash Purchase Plan.
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 will not be entitled to the
distribution to be declared to Stockholders of record
on [month day, year] which is payable in [month
year]. Whether a Stockholder is entitled to the
distribution to be declared to Stockholders of record
on [month day, year] which is payable in [month year]
will depend on the date Shares are actually issued to
the Stockholder.
Investment Manager and Aberdeen Asset Managers (C.I.)Limited ("Investment
Investment Adviser Manager") acts as the Fund's investment manager and
Aberdeen Asset Management Limited ("Investment
Adviser") acts as the Fund's investment adviser. The
Investment Manager and the Investment Adviser also
serve in these capacities for Aberdeen Asia-Pacific
Income Fund, Inc., a non-diversified, registered
closed-end management investment company, the shares
of which are listed on the American Stock Exchange
("AMEX") and the Pacific Stock Exchange ("PSE") under
the symbol "FAX," investing in debt securities of
issuers in
6
Australia, New Zealand and Asian countries; Aberdeen
Asia-Pacific Income Investment Company Limited, a
closed-end management investment company, the shares
of which are listed on the Toronto Stock Exchange
("TSX") under the symbol "FAP," investing in debt
securities of issuers in Australia, New Zealand and
other Asian countries; The First Asia Income Fund, a
closed-end investment trust, the units of which are
listed on the TSX under the symbol "FAI.UN,"
investing primarily in debt securities of issuers in
Australia, New Zealand and Asian countries; and
Aberdeen Australia Equity Fund, Inc., a
non-diversified, registered closed-end management
investment company, the shares of which are listed on
the AMEX and the PSE under the symbol "IAF,"
investing primarily in Australian listed equity
securities. In addition, the Investment Manager
currently manages Aberdeen Scots Trust and Aberdeen
G(7) Trust, each of which is a Canadian unit
investment trust.
Investment Experience. The Investment Manager and
Investment Adviser, together with other affiliates of
Aberdeen Asset Management PLC, (collectively, the
"Aberdeen Group") form a globally diversified
management firm. The Investment Manager and the
Investment Adviser are parties to a memorandum of
understanding ("MOU") with three affiliated Aberdeen
organizations, Aberdeen Asset Management Asia Limited
("Aberdeen Singapore"), Aberdeen Asset Managers
Limited ("Aberdeen UK") and [name of Aberdeen
Thailand entity] ("Aberdeen Thailand"). Pursuant to
the MOU, the Investment Manager and the Investment
Adviser have retained the services of investment
professionals from Aberdeen Singapore, Aberdeen UK
and Aberdeen Thailand to provide portfolio management
and/or trading services to the Fund, as well as other
U.S. funds managed by the Investment Manager and the
Investment Adviser.
As of the date of this prospectus, the Aberdeen Group
had approximately US $___ billion in assets under
management. Aberdeen Singapore is one of the largest
dedicated managers/advisers on Asian bonds globally,
with approximately US $___ billion of such assets
under management as of the date of this prospectus.
In Australia, the Aberdeen Group manages several
Australian institutional domestic bond mandates, in
addition to advising the Fund and other listed
closed-end funds.
Compensation of the The Fund pays the Investment Manager a fee at the
Investment Manager and annual rate of 0.65% of the Fund's average weekly net
Investment Adviser assets applicable to the shares of Common Stock and
the shares of Preferred Stock up to Common Stock and
the $200 million, 0.60% of the assets between $200
million and $500 million and 0.55% of the assets in
excess of $500 million. Under the Advisory Agreement,
the Investment Manager pays the Investment Adviser an
advisory fee at the annual rate of 0.15% of the
Fund's average weekly net assets with respect to
advice relating the Fund's overall portfolio
structure and at an annual rate of up to 0.10% of the
Fund's average weekly net assets with respect to
advice relating to the recommendation of specific
portfolio securities (offset by the amount, if any,
that the Investment Manager may pay other entities
for specific securities recommendations or research).
For purposes of calculating the Investment Manager's
fee and the Investment Adviser's fee, the Fund's
average weekly net assets are computed based upon net
asset value applicable to Common Stock and Preferred
Stock determined weekly and each fee is payable on
the first business day of each calendar month.
The Fund's Investment Manager and Investment Adviser
will benefit from the Offer because their fees are
based on the average net asset value applicable to
shares of Common Stock and Preferred Stock of the
Fund.
7
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
The following summarizes certain matters that should be considered,
among others, in connection with the Offer. For a more complete discussion of
the risk factors and special considerations involved in investing in the Fund's
shares, see "Risk Factors and Special Considerations."
Dilution - Net Asset Value and Assuming that Rights are exercised, Record Date
Non-Participation in the Offer Stockholders 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. It is not possible to determine the
extent of this dilution at this time because
the Fund does not know what proportion of the
Shares will be purchased as a result of the
Offer.
As of the date of this Prospectus, the
Subscription Price per share for the Offer is
less than the Fund's NAV per share. Assuming
that all Rights are exercised and there is no
change in the NAV per share, the aggregate net
asset value of each Record Date Stockholder's
shares of Common Stock should decrease as a
result of the Offer. The Fund cannot state
precisely the amount of any such decrease in
NAV because it is not known at this time what
the NAV per share will be on the Expiration
Date or what proportion of the Shares will be
purchased as part of the Offer.
If you do not exercise the Rights issued to
you, you may still transfer or sell these
Rights as set forth in this Prospectus. The
cash you receive from transferring your Rights
should serve as partial compensation for any
possible dilution of your interest in the Fund.
There can be no assurance, however, that a
market for the Rights will develop or that the
Rights will have any value. See "Risk Factors
and Special Considerations - Dilution - Net
Asset Value and Non-Participation in the
Offer."
Current Distribution Rate From its inception, the Fund has paid regular
monthly distributions. These distributions have
been paid from net investment income and
supplemented by realized capital gains and
return of paid-in capital. The amount of
monthly distributions has been adjusted
(principally downward) from time to time to
reflect the current interest rate environment.
For the current fiscal year, the distributions
to date have exceeded the sum of net investment
income and realized capital gains. To the
extent total distributions for the year exceed
the Fund's net investment income, the
difference will be deemed for income tax
purposes to have been distributed from realized
capital gains or will be treated as return of
capital, as applicable. Although the Fund
anticipates that investment of the proceeds in
higher yielding Global Debt Securities will
enable the Fund to increase the Fund's net
investment income above the current level,
Stockholders are cautioned that there can be no
guarantee of future performance.
The Fund's investment in Global Debt Securities
involves risks and uncertainties so that actual
results may differ materially from those
anticipated as a result of various factors. If
the anticipated results are not achieved, the
Fund may not be able to maintain the current
level of monthly distributions. The Fund
undertakes no obligation to update or revise
the disclosure in this Prospectus with regard
to the effect of increased investment in global
markets on the Fund's monthly distributions, to
reflect current events or circumstances after
the date of this Prospectus or to reflect the
occurrence of unanticipated events.
The Board of Directors reviews the level of
monthly distributions on a continuing basis at
its quarterly Board meetings. 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 will not be
entitled to the distribution to be declared to
Stockholders of record on [month day, year]
which is payable in [month year]. Whether a
Stockholder is entitled to the distribution to
be declared to Stockholders of
8
record on [month day, year] which is payable in
[month year] will depend on the date Shares are
actually issued to the Stockholder.
Interest Rate Fluctuations Fluctuations in interest rates in the relevant
bond markets can affect the Fund's NAV and
distribution rate. The Fund's NAV is adversely
affected during periods of rising interest
rates in those bond markets and is favorably
affected during periods when interest rates
fall. In addition, the Fund may recognize
capital losses, impacting its ability to
supplement distributable income, when bonds in
the Fund's portfolio are sold or mature at a
price which is less than the Fund's cost.
Any overall downward trend in interest rates
can also be expected ultimately to reduce
available yields to Fund Stockholders, which
could in turn result in a reduction in the
amount of the Fund's monthly distributions.
While interest rates in the Commonwealth
Countries were higher than interest rates in
the U.S. at the inception of the Fund in 1992,
yields on debt securities denominated in the
Commonwealth Currencies have generally declined
in recent years and are currently more
comparable to yields available in the United
States. Although relatively high levels of
interest rates are currently available in
global debt markets, there can be no assurance
that these rates will continue to be
obtainable.
Currency Exchange Rate To the extent that further global investments
Fluctuations are made in local currency denominated debt
securities, the Fund will be exposed to greater
foreign currency exchange risk. However, to the
extent that further global investments are U.S.
dollar-denominated, the foreign currency
exchange risk to which the Fund's portfolio is
exposed will be mitigated.
Currency exchange rates can fluctuate
significantly over short periods and can be
subject to unpredictable changes based on a
variety of factors including political
developments and the imposition of currency
controls by foreign governments. See "Risk
Factors and Special Considerations - Currency
Exchange Rate Fluctuations." A decline in the
value of the currency in which a portfolio
security is denominated against the U.S. dollar
will generally result in a decline in the U.S.
dollar value of the Fund's assets. If the
decline occurs after the Fund has accrued
income but before it has been received, the
Fund could be required to liquidate portfolio
securities to make distributions.
Currency exchange rate fluctuations can
decrease or eliminate income available for
distribution or conversely increase income
available for distribution. For example, if
currency exchange losses exceed net investment
income for a taxable year, the Fund would not
be able to make ordinary income distributions.
In that event, if distributions had been made
before the losses had been realized, they would
be recharacterized either as a return of
capital, thus reducing each Stockholder's cost
basis, or as a dividend from capital gains
rather than ordinary income.
Currency fluctuations against the U.S. dollar
in many foreign countries in which the Fund
invests have historically been profound and
negative. Although exchange rates against the
U.S. dollar have been favorable in recent
months, there can be no assurance that
favorable exchange rates will continue. Nor can
there be any assurance that currency
fluctuations against the U.S. dollar will not
return to being profound and negative. The Fund
will not seek to hedge against adverse currency
fluctuations in the Commonwealth Currencies.
Although the Fund may hedge against currency
fluctuations with respect to currencies other
than the Commonwealth Currencies, there can be
no assurance that it can employ a hedging
strategy successfully, nor can there be any
assurance that the Fund will employ a currency
hedge at any given time.
9
Risks Involved in Global Proposals approved by Common and Preferred
Investment - Credit Risk stockholders in March 1999 permit the Fund to
invest up to 15% of its total assets in
securities which, at the time of investment,
are rated below investment grade or, if
unrated, are in the opinion of the Investment
Manager, of equivalent quality. Among other
things, investment in securities which are
rated below investment grade requires skilled
credit analysis and reduces the overall credit
quality of the Fund's portfolio. As of July
31, 2002, 4.0% of the debt securities held in
the Fund's portfolio were rated below
investment grade. See "Risk Factors and
Special Considerations - Risks Involved in
Global Investment - Credit Risk."
Risks Involved in Global The Fund's investments could in the future be
Investment - Political and adversely affected by any increase in taxes or
Economic Risk by political, economic or diplomatic
developments in the countries in which the
Fund may invest. Moreover, accounting,
auditing and financial reporting standards and
other regulatory practices and requirements
vary from those applicable to entities subject
to regulation in the United States. Securities
of Emerging Market issuers involve different,
and sometimes greater, risks than securities
of issuers in Developed Markets and the
Commonwealth Countries. See "Risk Factors and
Special Considerations - Risks Involved in
Global Investment - Political and Economic
Risk."
Risks Involved in Global In some countries in which the Fund invests,
Investment - Liquidity Risks especially in some Emerging Markets, there is
no established secondary market for
securities. Therefore, liquidity in these
countries is generally low and transaction
costs high. Reduced liquidity often creates
higher volatility, as well as difficulties in
obtaining accurate market quotations for
financial reporting purposes and for
calculating net asset values, and sometimes
also an inability to buy and sell securities.
See "Risk Factors and Special Considerations -
Risks Involved in Global Investment -
Liquidity Risk."
Use of Derivatives The Fund may, with respect to the Global Debt
Securities portion of its portfolio, use
derivatives to manage currency and interest
rate risk and to replicate or substitute for
Physical Securities. The Fund may also use
derivatives with respect to its investments
denominated in Commonwealth Currencies to
manage interest rate risk through investing in
exchange-traded interest rate derivatives.
The use of derivatives will expose the Fund to
a variety of risks which include:
. an imperfect correlation between the price
of derivatives and the movement of the
securities prices, interest rates or
currency exchange rates being hedged or
replicated;
. the possible absence of a liquid secondary
market for any particular derivative at any
time;
. the potential loss if the counterparty to
the transaction does not perform as
promised;
. the possible need to defer closing out
certain positions to avoid adverse tax
consequences, as well as the possibility
that derivative transactions may result in
acceleration of gain, deferral of losses or
a change in the character of gain realized;
. the risk that the financial intermediary
"manufacturing" the over-the-counter
derivative, being the most active market
maker and offering the best price for
repurchase, will not continue to create a
credible market in the derivative;
. because certain derivatives are
"manufactured" by financial institutions,
the risk that the Fund may develop a
substantial exposure to financial
institution counterparties; and
. the risk that a full and complete
appreciation of the complexity of
derivatives and how future value is
affected by various factors including
changing interest rates, exchange rates and
credit quality is not attained.
10
See "Risk Factors and Special Considerations -
Use of Derivatives." In general, derivatives
will not be used to leverage the Fund,
although they may be used to hedge the
interest risk associated with the Fund's
outstanding leverage.
The Fund may use interest rate swaps to hedge
the Fund's liability with respect to the
Preferred Stock. At present, the Fund has been
authorized by its Board of Directors to hedge
up to one-third of the Fund's liability with
respect to the Preferred Stock. This allows
the Fund to lock in the relatively low current
U.S. dollar interest rates, if available, with
respect to up to one-third of the Fund's
outstanding Preferred Stock. A significant
type of risk associated with interest rate
swaps is the risk that the counterparty may
default or file for bankruptcy, in which case
the Fund would bear the risk of loss of the
amount expected to be received under the swap
agreement. There can be no assurance that the
Fund will have an interest rate swap in place
at any given time, nor can there be any
assurance that, if an interest rate swap is in
place, it will be successful in hedging the
Fund's interest rate risk with respect to the
Preferred Stock. See "Portfolio Securities -
Derivative Securities - Swaps," "Risk Factors
and Special Considerations - Use of
Derivatives" and "Risk Factors and Special
Considerations - Preferred Stock - Leverage
Risk."
Preferred Stock - Leverage Risk Investors should note that leverage resulting
from the issuance of Preferred Stock creates
risks for holders of Common Stock, including
higher volatility of both the NAV and market
value of the Common Stock, and that
fluctuations in the dividend rates on
Preferred Stock will affect the yield to
holders of Common Stock. If the Fund is able
to realize a net return on its investment
portfolio in excess of the then current
dividend rate of the Preferred Stock, the
effect of leverage permits holders of Common
Stock to realize a higher current rate of
return than if the Fund were not leveraged. On
the other hand, if the current dividend rate
on the Preferred Stock exceeds the net return
on the Fund's investment portfolio, the Fund's
leveraged capital structure results in a lower
rate of return to holders of Common Stock than
if the Fund were not leveraged. Similarly,
because any decline in the NAV of the Fund's
investments will be borne entirely by holders
of Common Stock, the effect of leverage in a
declining market results in a greater decrease
in NAV to holders of Common Stock than if the
Fund were not leveraged, which would likely be
reflected in a greater decline in the market
price for shares of Common Stock. Moreover,
because dividends and other distributions on
Preferred Stock are payable in U.S. dollars, a
decline in value against the U.S. dollar of
currencies in which portfolio securities are
denominated also impacts negatively on the
rate of return to holders of Common Stock. If
the Fund's current investment income were not
sufficient to meet dividend requirements on
the Preferred Stock, it could be necessary for
the Fund to liquidate certain of its
investments, thereby reducing the NAV
attributable to the Fund's Common Stock. See
"Risk Factors and Special Considerations -
Preferred Stock - Leverage Risk."
In order to reduce the risk that the dividend
requirements on the Preferred Stock will
exceed the net return of the Fund's investment
portfolio, the Fund may use interest rate
swaps to hedge the Fund's liability with
respect to the Preferred Stock. At present,
the Fund has been authorized by its Board of
Directors to hedge up to one-third of the
Fund's liability with respect to the Preferred
Stock. This allows the Fund to lock in the
relatively low current U.S. dollar interest
rates with respect to up to one-third of the
Fund's outstanding Preferred Stock. There can
be no assurance that the Fund will have an
interest rate swap in place at any given time,
nor can there be any assurance that, if an
interest rate swap is in place, it will be
successful in hedging the Fund's leverage risk
with respect to the Preferred Stock. See
"Portfolio Securities - Derivative Securities
- Swaps," "Risk Factors and Special
Considerations - Use of Derivatives" and "Risk
Factors and Special Considerations - Preferred
Stock - Leverage Risk."
Holders of Common Stock have generally
benefited from the Fund's issuance of the
Preferred Stock which commenced in 1992. Since
the fiscal quarter beginning
11
August 1, 1997, there have been periods during
which the shrinking yield differential between
rates available in the Commonwealth Countries
and rates available in the U.S. combined with
the depreciation of the Commonwealth
Currencies have resulted in the Preferred
Stock having a negative impact on the total
return to holders of Common Stock. During the
12 months to July 31, 2002, the key investment
trend was an end to the unilateral strength of
the U.S. dollar. With U.S. interest rates at
historic lows, the differential between the
cost of the Preferred Stock and the rates at
which the Fund invests has been positive in
recent months. Offsetting these impacts
slightly have been capital losses as bond
yields have risen in line with signs of global
recovery.
Because the Investment Manager's and the
Investment Adviser's fees are based on the
average net assets of the Fund, which include
the Preferred Stock, the Investment Manager
and Investment Adviser have benefited from the
Fund's determination not to redeem the
Preferred Stock.
The proposed increased investment of a more
significant percentage of the Fund's total
assets in higher yielding Global Debt
Securities is expected to increase the Fund's
net investment income above the current level
by taking increased advantage of the
relatively high level of interest rates
currently available in global securities
markets compared with interest rates currently
prevailing in the Commonwealth Countries. See
"The Offer - Purpose of the Offer." The
implementation of this strategy is proposed to
occur within approximately one to four months
of the completion of the Offer by a
combination of investing the net proceeds of
the Offer together with the proceeds from the
sale of existing portfolio securities and
proceeds received from maturing Commonwealth
debt securities held in the Fund's portfolio.
Stockholders are cautioned that there can be
no guarantee of future performance and the
Fund's investment in Global Debt Securities
involves risks and uncertainties, so that
actual results may differ materially from
those anticipated as a result of various
factors. The Fund undertakes no obligation to
update or revise the disclosure in this
Prospectus with regard to the effect of
increased investment in global markets on the
Fund's leverage, current events or
circumstances after the date of this
Prospectus or the occurrence of unanticipated
events.
Discount from Net Asset Value The Fund's shares have traded in the market
below, at and above NAV since the commencement
of the Fund's operations. This characteristic
of shares of closed-end investment companies
is a risk separate and distinct from the risk
that the Fund's NAV will decrease. In the
12-month period ended August 31, 2002, the
Fund's shares have traded in the market at an
average discount to NAV of 6.9%. As of August
31, 2002, the discount to NAV had narrowed to
2.8%. See "The Fund - Description of Common
Stock."
Foreign Custody The Fund generally holds its foreign
securities and cash in foreign banks and
securities depositories. Some foreign banks
and securities depositories may be recently
organized or new to the foreign custody
business. Regulatory oversight over their
operations may be limited or non-existent.
Also, the laws of certain countries may put
limits on the Fund's ability to recover its
assets if a foreign bank, depository or issuer
of a security, or any of their agents, goes
bankrupt. In addition, it is often more
expensive for the Fund to buy, sell and hold
securities in certain foreign markets than in
the United States. The increased expense of
investing in foreign markets reduces the
amount the Fund can earn on its investments
and typically results in a higher operating
expense ratio for the Fund than for investment
companies invested only in the United States.
12
Non-Diversified Status The Fund is classified as a "non-diversified"
management investment company under the 1940
Act, which means that the Fund is not limited by
the 1940 Act as to the proportion of its assets
that may be invested in the securities of a
single issuer. As a non-diversified investment
company, the Fund may invest a greater
proportion of its assets in the obligations of a
smaller number of issuers and, as a result, will
be subject to greater risk with respect to its
portfolio securities. Although the Fund must
diversify its holdings in order to be treated as
a regulated investment company under the
provisions of the Internal Revenue Code of 1986,
as amended ("Code"), the Fund may be more
susceptible to any single economic, political or
regulatory occurrence than would be the case if
it had elected to diversify its holdings
sufficiently to be classified as a "diversified"
management investment company under the 1940
Act. See "Investment Objective and Policies,"
"Investment Restrictions" and "Taxation - United
States Taxes."
Tax Considerations Withholding and/or other taxes may apply in the
countries in which the Fund invests, which will
reduce the Fund's cash return in those
countries. The Fund intends to elect, when
eligible, to "pass-through" to the Fund's
stockholders, as a deduction or credit, the
amount of foreign income and similar taxes paid
by the Fund. See "Taxation."
Anti-Takeover Provisions The Fund has provisions in its Articles of
Amendment and Restatement, as amended to date
("Articles"), that could have the effect of
limiting the ability of other entities or
persons to acquire control of the Fund. The
Articles provide for a staggered election of
those Directors who are elected by the holders
of Common Stock, with such Directors divided
into three classes, each having a term of three
years. Accordingly, only those Directors in one
class may be changed in any one year and it
would require two years to change a majority of
the Board of Directors. This system of electing
Directors may be regarded as having an
anti-takeover effect, and may have the effect of
maintaining the continuity of management and
thus may make it more difficult for the Fund's
Stockholders to change the majority of
Directors.
Articles Supplementary approved by the Board of
Directors subject the Fund to certain provisions
of the Maryland General Corporation Law with
respect to unsolicited takeovers. These
provisions limit the ability of stockholders to
remove directors, provide that the number of
directors may be fixed only by the Board,
provide that certain vacancies on the Board of
Directors may be filled only by the vote of the
remaining directors, and limit the ability of
stockholders to call a special meeting of
stockholders. See "Capital Stock - Certain
Provisions of the Articles, By-Laws and Articles
Supplementary."
13
FUND EXPENSES
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price)/(1)/ ....... 3.75%
Dividend Reinvestment and Cash Purchase Plan Fees ................. None
Annual Expenses (as a percentage of net assets attributable to the Common
Stock)/(2)/
Management Fee .................................................... 0.___%
Administrative Fee ................................................ 0.___%
Other Expenses/(3)/ ............................................... 0.___%
------
Total Annual Expenses/(4)/ ........................................ %
======
-------------------
(1) The Fund has agreed to pay the Dealer Managers a fee for their financial
advisory, marketing and soliciting services equal to an aggregate of
3.75% of the aggregate Subscription Price for the Shares issued pursuant to
the Offer and to reimburse the Dealer Managers for their out-of-pocket
expenses up to $50,000. In addition, the Fund has agreed to pay a fee to
each of the Subscription Agent and the Information Agent estimated to be
$______ and $34,000, respectively, which includes reimbursement for their
out-of-pocket expenses related to the Offer. Total offering expenses are
estimated to be $___________, which assumes that the Offer is fully
subscribed. These fees will be borne by the Fund and indirectly by all of
the Fund's Stockholders, including those who do not exercise their Rights.
See "Distribution Arrangements."
(2) Fees payable under the Management Agreement and Administration Agreement
are calculated on the basis of the Fund's average weekly net assets
applicable to the Fund's Common and Preferred Stock. See "Management
Agreement and Advisory Agreement" and "Administration Agreement." "Other
Expenses" have been estimated for the current fiscal year.
(3) Other Expenses include amounts paid to Aberdeen Asset Management Investor
Relations, an affiliate of the Fund's Investment Manager and Investment
Adviser, for investor relations services.
(4) The indicated ____% expense ratio assumes that the Offer is fully
subscribed, yielding estimated net proceeds of approximately $____________
(assuming a Subscription Price of $____) and that, as a result, based on
the Fund's net assets of $__________ million attributable to holders of
Common Stock on [Record Date]; the net assets attributable to Stockholders
would be $___________ million. It also assumes that net assets attributable
to Stockholders will not increase or decrease due to currency fluctuations.
The indicated ratio reflects all expenses of the Offer.
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.
Hypothetical Example
An investor would directly or indirectly pay the following expenses on
a $1,000 investment in the Fund, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$___ $___ $___ $___
This Hypothetical Example assumes that all dividends and other
distributions are reinvested at NAV and that the percentage amounts listed under
Annual Expenses above remain the same in the years shown. (See also Note (4)
above for assumptions made in calculating the expenses in this Hypothetical
Example.) The above tables and the assumption in the Hypothetical Example of a
5% annual return are required by regulation of the SEC applicable to all
investment companies; the assumed 5% annual return is not a prediction of, and
does not represent, the projected or actual performance of the Fund's shares.
This Hypothetical Example reflects all recurring and non-recurring fees,
including underwriting discounts and commissions. For more complete descriptions
of certain of the Fund's costs and expenses, see "Management of the Fund,"
"Management Agreement and Advisory Agreement" and "Administration Agreement."
This Hypothetical Example should not be considered a representation of
past or future expenses, and the Fund's actual expenses may be greater or less
than those shown.
14
FINANCIAL HIGHLIGHTS
The following information, insofar as it relates to each year of the 10-year
period ended October 31, 2001, has been audited by PricewaterhouseCoopers LLP,
independent accountants for the Fund, whose reports thereon were unqualified.
This information should be read in conjunction with the Financial Statements and
Notes thereto and incorporated by reference in this Prospectus.
Six Months
Ended
April 30, For the Year Ended October 31,
2002
(unaudited)(1) 2001 2000 1999 1998 1997 1996
Per Share Operating Performance
Net asset value per common share, beginning of period .... $ 9.99 $ 10.20 $ 12.14 $ 13.07 $ 13.94 $ 14.32 $ 13.13
-------- -------- ------- -------- -------- -------- --------
Net investment income .................................... 0.26 0.71 0.81 0.87 0.99 1.14 1.16
Net realized and unrealized gains (losses) on
investments and foreign currencies .................. (0.15) 0.07 (1.68) (0.70) (0.73) (0.34) 1.21
-------- -------- ------- -------- -------- -------- --------
Total from investment operations .................... 0.11 0.78 (0.87) 0.17 0.26 0.80 2.37
-------- -------- ------- -------- -------- -------- --------
Dividends from net investment income to common
stockholders ........................................ (0.38) (0.34) (0.71) (0.62) (0.87) (0.99) (1.00)
Dividends from net investment income to preferred
stockholders ........................................ (0.03) (0.15) (0.16) (0.11) (0.14) (0.17) (0.16)
Return of capital to common stockholders ................. - (0.50) - - - - -
Distributions from net realized gains on investment
transactions to common stockholders ................. - - (0.16) (0.33) (0.08) (0.02) (0.01)
Distributions from net realized gains on investment
transactions to preferred stockholders .............. - - (0.04) (0.04) (0.04) - (0.01)
-------- -------- ------- -------- -------- -------- --------
Total dividends and distributions ................... (0.38) (0.99) (1.07) (1.10) (1.13) (1.18) (1.18)
-------- -------- ------- -------- -------- -------- --------
Capital charge in respect to issuance of preferred shares - - - - - - -
Net asset value per common share, end of period .......... $ 9.69 $ 9.99 $ 10.20 $ 12.14 $ 13.07 $ 13.94 $ 14.32
======== ======== ======= ======== ======== ======== ========
Market value, end of period .............................. $ 8.85 $ 9.00 $8.8750 $ 10.375 $10.8125 $12.4375 $ 11.88
======== ======== ======= ======== ======== ======== ========
Number of shares of common stock outstanding
(000 omitted) ....................................... 9,266 9,266 9,266 9,266 9,266 9,266 9,266
Total investment return based on: /(2)/
Market value ........................................ 3.46% 11.20% (6.11)% 4.89% (5.59)% 13.78% 13.89%
Net asset value ..................................... 1.64% 7.40% (7.78)% 1.53% 1.82% 5.76% 18.99%
Ratio to Average Net Assets of Common
Stockholders/(4)/Supplementary Data:
Net assets of common stockholders, end of period
(000 omitted) ....................................... $ 89,784 $ 92,539 $94,494 $112,504 $121,096 $129,158 $132,660
Average net assets of common stockholders
(000 omitted) ....................................... 89,432 93,987 105,657 119,257 122,266 130,125 122,887
Operating expenses ....................................... 2.10% 2.11% 2.02% 1.95% 1.70% 1.63% 1.70%
Net investment income available to common
stockholders /(4)/ .................................. 4.66% 5.46% 5.39% 5.53% 6.17% 6.88% 7.47%
Portfolio turnover ....................................... 11% 17% 29% 40% 36% 24% 30%
Senior securities (preferred stock) outstanding
(000 omitted) ....................................... $ 30,000 $ 30,000 $30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Asset coverage on preferred stock at year end ............ 399% 408% 415% 475% 504% 530% 542%
For the
Period
February
28, 1992*
Through
October 31,
1995 1994 1993 1992
Per Share Operating Performance
Net asset value per common share, beginning of period .... $ 12.08 $ 13.42 $ 13.00 $ 13.89
-------- -------- -------- --------
Net investment income .................................... 1.19 1.16 1.19 0.83
Net realized and unrealized gains (losses) on
investments and foreign currencies .................. 1.10 (1.33) 0.55 (0.76)
------- -------- -------- --------
Total from investment operations .................... 2.29 (0.17) 1.74 0.07
------- -------- -------- -------
Dividends from net investment income to common
stockholders ........................................ (1.03) (0.98) (0.96) (0.80)
Dividends from net investment income to preferred
stockholders ........................................ (0.18) (0.11) (0.08) (0.03)
Return of capital to common stockholders ................. - - - (0.04)
Distributions from net realized gains on investment
transactions to common stockholders ................. (0.03) (0.07) (0.26) -
Distributions from net realized gains on investment
transactions to preferred stockholders .............. - (0.01) (0.02) -
-------- -------- -------- --------
Total dividends and distributions ................... (1.24) (1.17) (1.32) (0.87)
-------- -------- -------- --------
Capital charge in respect to issuance of preferred shares - - - (0.09)
Net asset value per common share, end of period .......... $ 13.13 $ 12.08 $ 13.42 $ 13.00
======== ======== ======== ========
Market value, end of period .............................. $ 11.38 $ 10.38 $ 12.63 $ 13.50
======== ======== ======== ========
Number of shares of common stock outstanding
(000 omitted) ....................................... 9,266 9,266 9,249 9,176
Total investment return based on:/(2)/
Market value ........................................ 20.72% (10.19)% 2.65% (4.50)%/(3)/
Net asset value ..................................... 19.67% (1.63)% 13.31% (0.69)%/(3)/
Ratio to Average Net Assets of Common
Stockholders/(4)/Supplementary Data:
Net assets of common stockholders, end of period
(000 omitted) ....................................... $121,654 $111,925 $124,146 $119,302
Average net assets of common stockholders
(000 omitted) ....................................... 115,277 118,336 121,323 125,794
Operating expenses ....................................... 1.71% 1.75% 1.73% 1.59% /(5)/
Net investment income available to common
stockholders /(4)/................................... 8.09% 8.12% 8.25% 8.43% /(5)/
Portfolio turnover ....................................... 23% 34% 41% 18%
Senior securities (preferred stock) outstanding
(000 omitted) ....................................... $ 30,000 $ 30,000 $ 30,000 $30,000
Asset coverage on preferred stock at year end ............ 505% 473% 514% 498%
15
--------------------
(1) As required, effective 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 six
months ended April 30, 2002 was to decrease net investment income per share
by $0.05, decrease net realized and unrealized loss on investments and
foreign exchange losses by $0.05 and decrease the ratio of net investment
income to average net assets from 5.71% to 4.66% based on common
stockholders. Per share, ratios and supplemental data for periods prior to
November 1, 2001 have not been restated to reflect this change in
presentation.
(2) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each period reported. Dividends and distributions, if any, are assumed
for the purposes of this calculation to be reinvested at prices obtained
under the Fund's dividend reinvestment plan. Total investment return does
not reflect brokerage commissions. Generally, total investment return based
on net asset value will be higher than total investment return based on
market value in years where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from the
beginning to the end of such years. Conversely, total investment return
based on net asset value will be lower than total investment return based
on market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of such years.
(3) Total investment returns for periods of less than one full year are not
annualized.
(4) Ratios are calculated on the basis of income and expenses applicable to
both the common and preferred shares relative to the average net assets of
common stockholders. Ratio of net investment income before preferred stock
dividends to average net assets of common stockholders is 5.34%, 6.98%,
7.12%, 6.76%, 7.50%, 8.10%, 8.73%, 9.56%, 9.06%, 9.03% and 8.72%,
respectively.
(5) Annualized.
* Commencement of investment operations.
+ Net of offering costs of $0.16 charged to paid-in capital in respect to
issuance of common shares.
Note: Contained above is operating performance for a share of Common Stock
outstanding, total investment return, ratios to average net assets of
Stockholders and other supplemental data for each of the periods indicated. This
information has been determined based upon financial information provided in the
financial statements and market value data for the Fund's Common Stock.
16
THE OFFER
Terms of the Offer
The Fund is issuing to Record Date Stockholders transferable rights to
subscribe for an aggregate of [# of shares] Shares. Each Record Date Stockholder
is being issued one transferable Right for each whole share of Common Stock
owned on the Record Date. The number of Rights issued to a Record Date
Stockholder will be rounded up to the nearest number of Rights evenly divisible
by __. In the case of shares of Common Stock held of record by Cede & Co.
("Cede"), as nominee for the Depository Trust Company ("DTC"), or any other
depository or nominee, the number of Rights issued to Cede or such other
depository or nominee will be adjusted to permit rounding up (to the nearest
number of Rights evenly divisible by __) of the Rights to be received by
beneficial owners for whom it is the holder of record only if Cede or such other
depository or nominee provides to the Fund on or before the close of business on
______, 2002, a written representation of the number of Rights required for such
rounding.
The Rights entitle the Stockholder to acquire at the Subscription Price
one Share for every __ Rights held (1-for-__). Rights may be exercised at any
time during the Subscription Period, which commences on [Start Subscription
Period] and ends at 5:00 p.m., New York City time, on [Expiration Date], unless
extended by the Fund ("Expiration Date"). A Stockholder's right to acquire,
during the Subscription Period at the Subscription Price, one Share for every __
Rights held is hereinafter referred to as the "Primary Subscription." A
Stockholder who exercises Rights pursuant to the Primary Subscription is
hereinafter referred to as an "Exercising Stockholder." The Rights will be
listed for trading on the NYSE under the symbol "FCO.RT" during the course of
the offering. The Shares, once issued, will be listed on the NYSE under the
symbol "FCO." The Rights will be evidenced by subscription certificates which
will be mailed to Record Date Stockholders, except as discussed below under
"Foreign Stockholders."
The Rights are transferable among Record Date Stockholders and
non-Record Date Stockholders. Holders of Rights who are not Record Date
Stockholders ("Rights Holders") may purchase Shares in the Primary Subscription,
but are not entitled to subscribe for Shares pursuant to the Over-Subscription
Privilege described below. Record Date Stockholders and Rights Holders
purchasing Shares in the Primary Subscription and Record Date Stockholders who
purchase Shares pursuant to the Over-Subscription Privilege are hereinafter
referred to as "Exercising Rights Holders."
Shares not subscribed for in the Primary Subscription will be offered,
pursuant to the Over-Subscription Privilege, to those Record Date Stockholders
who have exercised all Rights issued to them and who wish to acquire more than
the number of Shares they are entitled to purchase pursuant to the exercise of
their Rights. Shares acquired pursuant to the Over-Subscription Privilege are
subject to allotment, as more fully discussed below under "The
Offer-Over-Subscription Privilege." For purposes of determining the number of
Shares a Stockholder may acquire pursuant to the Offer, broker-dealers, trust
companies, banks or others whose Shares are held of record by Cede or by any
other depository or nominee will be deemed to be the holders of the Rights that
are issued to Cede or the other depository or nominee on their behalf.
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 those Shares. The record date for
distributions is generally the last business day of the month in which the
distribution is declared. It is the Fund's present policy to pay distributions
on the Friday nearest the middle of the month following the record date for such
distribution. As a result of the timing of the Offer, with respect
17
to Shares issued in connection with Rights exercised before the end of the
Subscription Period, it is expected that the first distribution received by the
holders of those Shares will be paid in mid-[month year]. With respect to Shares
issued in connection with Rights exercised after the end of the Subscription
Period, it is expected that the first distribution received by the holders of
those Shares will be paid in mid-[month year].
There is no minimum number of Rights which must be exercised in order
for the Offer to close.
Purpose of the Offer
The Fund seeks to maintain a stable monthly cash distribution
consistent with its investment objective of providing current income. To this
end, in June 1999, the Fund adopted a managed distribution policy that calls for
supplementing monthly distributions paid out of available net investment income
with realized capital gains and returns of paid-in capital to the extent
necessary to maintain a stable monthly distribution rate. As interest rates have
fallen in the Commonwealth Countries, on the basis of the advice of the
Investment Manager and Investment Adviser, the Fund's Board of Directors from
time to time has reduced the level of monthly distribution payments (principally
downward) to reflect the then-current interest rate environment. The last
reduction occurred in February 2002, when the regular monthly distribution was
reduced from U.S. 7 cents per share of Common Stock to U.S. 6 cents per share of
Common Stock.
In order to address the prospect of declining distributions, the Fund's
Investment Manager and Investment Adviser, in December 1998, proposed to the
Board of Directors that the Fund's investment objective, investment policies and
investment restrictions be expanded to enable the Fund to invest up to 35% of
its assets in Global Debt Securities. The Investment Manager and Investment
Adviser indicated that, in their view, the relatively high level of interest
rates then available in global markets compared with interest rates
then-prevailing in the Commonwealth Countries, as well as in other Group of 7
(G7) markets (i.e., France, the United States, Germany, Japan and Italy),
offered the opportunity to achieve greater diversification and scope for capital
gains, as well as higher yields compared with interest rates then-prevailing in
the Commonwealth Countries. They also emphasized that this would introduce an
extra element of risk in implementing the Fund's investment objective, since
implementation of the proposal was expected to reduce the average quality of the
Fund's portfolio.
The Board took into account that investment in certain global debt
markets, especially in emerging markets, may expose the Fund to greater interest
rate risk, foreign exchange risk, credit risk, political and economic risk
("event risk") and liquidity risk, than was then the case. These risks, as well
as risks associated with less transparent accounting and auditing standards and
less developed legal systems, could, the Board recognized, increase the
likelihood that losses in net asset value may more than offset the positive
effect of higher apparent yields in these markets. In addition, the Board noted
that the Fund's total investment return may be expected to become more volatile,
and that the Fund's $30 million outstanding Preferred Stock could exacerbate
this increased volatility.
The Board took into account that no more than 35% of the Fund's total
assets could be exposed to global debt markets other than the Commonwealth
Countries and that the Investment Manager and Investment Adviser would seek to
mitigate risk through an active management style operating within pre-set risk
limits. It also considered the fact that investors who did not wish to assume
the greater risk associated with global investments would be able to sell their
holdings to investors who seek higher yields, while accepting the concomitant
increase in risk.
The Board noted that, at the Fund's inception in 1992, interest rates
in the Commonwealth Countries were then higher than interest rates prevailing in
the United States but that in more recent years
18
improving economic fundamentals in the Commonwealth Countries, including lower
inflation, budget deficit containment and lower unemployment rates, have served
to narrow or eliminate the favorable spread over U.S. bond rates. The Board
determined that expanding the Fund's investment policies to include investment
in Global Debt Securities in markets with interest rates that were then
significantly higher than prevailing rates in the United States, and in lower
quality bonds which generally offer higher yields, could provide a means of
improving the Fund's return.
After in-depth consideration, the Fund's Board determined to recommend
to the Fund's Common and Preferred stockholders that the Fund's investment
objective, investment policies and investment restrictions be amended in order
to enable the Fund to invest up to 35% of its total assets in Global Debt
Securities. On March 26, 1999, the holders of the Fund's Common Stock and
Preferred Stock approved a series of proposals allowing the Fund, among other
things, to:
. invest up to 35% of its total assets in Global Debt Securities;
. reduce the average quality of its portfolio to A or better;
. invest up to 15% of its total assets in debt securities rated, or
judged by the Investment Manager to be, below investment grade at
the time of investment;
. use derivatives to manage currency and interest rate risk, as well
as replicate or substitute for Physical Securities; and
. invest in the securities of other investment companies that
themselves invest primarily in fixed-income securities.
The proxy statement soliciting the approval of the holders of the
Fund's Common Stock and Preferred Stock explained that, in light of the
prevailing uncertainties in global markets at the time of the proxy statement,
the Investment Manager had proposed to implement the new global investment
strategy in two phases. Phase One, to be implemented immediately following the
March 1999 stockholders meeting, would involve immediately investing up to 20%
of the Fund's assets in Asian debt securities. Phase One investments would be
made through the selective sale of existing securities and the reinvestment of
the proceeds of maturing securities. Phase Two was proposed to involve
investment in global markets outside the Asian Countries and the four
Commonwealth Countries, as well as investment in other investment companies
registered under the 1940 Act if believed justified by the Investment Manager
and the Board. The proxy statement also indicated that Phase Two would probably
be implemented with the proceeds of a rights offering.
On September 3, 2001, the Board of Directors authorized the Investment
Manager, in its discretion, to implement Phase Two of the global investment
strategy. Following the Board of Directors' approval to begin Phase Two of the
global investment strategy approved by the Fund's Common and Preferred
stockholders in March 1999, the Investment Manager and Investment Adviser began
a thorough analysis of how best to implement the global investment strategy in
terms of selecting markets in which to invest, the timing of those investments
and how such investments would be appropriately funded. After identifying
several promising global markets, the Investment Manager and Investment Adviser
began slowly restructuring the Fund's portfolio and making selective investments
in Global Debt Securities. As of July 31, 2002, 12.2% of the Fund's total assets
were held in Global Debt Securities, split regionally as follows:
19
--------------------------------------------------------
Region % of Total Assets
------ -----------------
--------------------------------------------------------
Asia 7.9%
--------------------------------------------------------
Eastern Europe 2.2%
--------------------------------------------------------
Latin America 1.4%
--------------------------------------------------------
Western Europe (ex-UK) 0.7%
--------------------------------------------------------
Total 12.2%
--------------------------------------------------------
Further investments in Global Debt Securities have been constrained throughout
2002 by the fact that the Fund could potentially have to realize additional
significant foreign exchange losses if more securities denominated in the
Commonwealth Currencies are sold or mature and the proceeds are converted into
the relevant local currencies or into U.S. dollars in order to purchase Global
Debt Securities. However, by using the proceeds of a rights offering rather than
reallocating assets currently in its portfolio, the Fund would not necessarily
have to realize the substantial foreign exchange losses that might otherwise be
realized if the portfolio were internally restructured.
At the regularly scheduled meeting of the Board of Directors held on
June 19, 2002, the Investment Manager proposed that the Directors consider
approval of a rights offering, and outlined the reasons therefor. The Directors
determined that, prior to the next regularly scheduled meeting of the Board of
Directors to be held in September 2002, a Rights Offering Committee of the Board
should evaluate a formal proposal of the Investment Manager and the Investment
Adviser. The Directors agreed that the Rights Offering Committee should consider
the benefits and costs to the Fund's existing stockholders, including the
dilutionary impact of a rights offering relative to the other options available
to the Fund, before making a recommendation to the Board. The Directors
thereupon appointed a Rights Offering Committee, composed of four Directors:
Messrs. Neville J. Miles, William J. Potter, Peter D. Sacks and John T. Sheehy,
who are not "interested persons" (as that term is defined in Section 2(a)(19) of
the 1940 Act) of the Fund, the Investment Manager, the Investment Adviser or the
Dealer Managers.
In August 2002, the Investment Manager and Investment Adviser jointly
prepared a written report addressing the timing of further investments in Global
Debt Securities and the most appropriate method of funding any further
investments in light of current market conditions ("Aberdeen Report"). The
Aberdeen Report concluded that further investments in Global Debt Securities
should be funded using a combination of (i) the Fund's cash holdings then
earmarked for investment in Global Debt Securities, which amounted to 7.6% of
the Fund's total assets as of June 30, 2002; (ii) the proceeds of further
selective selling of bonds denominated in the Commonwealth Currencies; and (iii)
the proceeds of a rights offering. The Aberdeen Report presented a variety of
ratios of number of rights to number of outstanding shares for the Board of
Directors to consider when determining whether to approve the Offer.
The Aberdeen Report was first circulated to the members of the Rights
Offering Committee for their review. Subsequently, on August 27, 2002, the
Rights Offering Committee met with representatives of the Investment Manager and
the Investment Adviser, together with representatives of a potential dealer
manager. During this meeting, as well as on other occasions, the members of the
Rights Offering Committee had the opportunity to consult with counsel to the
Independent Directors of the Fund ("Independent Counsel"), as well as with
counsel to the Fund, the Investment Manager and the Investment Adviser ("Fund
Counsel"). After extensive discussions, the Rights Offering Committee agreed to
recommend to the full Board that the Fund proceed with the Offer. The Aberdeen
Report was then circulated to the full Board of Directors, together with the
recommendation of the Rights Offering Committee.
The full Board considered the matter at its regular quarterly meeting
held on September 12, 2002. The members of the Rights Offering Committee
reviewed with the full Board the provisions of the Aberdeen Report, and
explained the reasons why the Committee had determined to recommend that the
20
Board approve the Offer. The Directors then engaged in an extensive discussion
regarding the proposal and the Aberdeen Report with representatives of the
Investment Manager and the Investment Adviser. During this meeting, as well as
on other occasions, the independent directors had the opportunity to consult
with Independent Counsel and Fund Counsel. The Board determined, by the
unanimous vote of all of the Directors who are not "interested persons" (as that
term is defined in Section 2(a)(19) of the 1940 Act) of the Fund, the Investment
Manager, the Investment Adviser or the Dealer Managers, as well as the unanimous
vote of the full Board, to authorize the Fund to engage in a rights offering.
The Directors authorized the members of the Rights Offering Committee to make
further determinations regarding the terms and structure of the Offer, upon
consultation with the representatives of the Investment Manager and the
Investment Adviser, the dealer managers, Independent Counsel and Fund Counsel.
On October 3, 2002, the members of the Rights Offering Committee met
with representatives of the Investment Manager, the Investment Adviser, a
potential dealer manager, Independent Counsel and Fund Counsel. A lengthy
discussion was held, during which the Committee determined that the reasons for
the Fund to engage in the Offer remained compelling. The Committee agreed to
recommend to the full Board that the Fund proceed with the Offer and file a
registration statement with the SEC. The Board subsequently unanimously approved
proceeding with the Offer and filing the registration statement.
The Investment Manager and Investment Adviser believe that an increase
in the size of the Fund should result in an incidental modest reduction in the
Fund's expense ratio, which would be of long-term benefit to Stockholders. The
Offer also seeks to reward Stockholders by giving them the right to purchase
additional Shares at a discount, although Stockholders who do not fully exercise
their Rights will own, upon completion of the Offer, a smaller proportional
interest in the Fund than they owned prior to the Offer. See "The Offer" and
"Risk Factors and Special Considerations."
THERE CAN BE NO ASSURANCE THAT THE FUND OR ITS STOCKHOLDERS WILL
ACHIEVE ANY OF THE FOREGOING OBJECTIVES OR BENEFITS THROUGH THE OFFER.
The Board of Directors has also considered the impact of the Offer on
the Fund's NAV per share. The Subscription Price per share is $____, which
represents a ____% discount to the Fund's NAV per share as of _________, 2002
[(the last trading date on which the Fund publicly reported its net asset value
prior to the date of this Prospectus)]. Assuming that all rights are exercised
and there is no change in the Fund's NAV per share, the Offer (after expenses)
should result in a decrease in the Fund's NAV per share, and, therefore, the
Offer (after expenses) is expected to result in a dilution to the Fund's NAV per
share, which could be substantial. Although the Fund has sought to restrict
potential dilution, the extent of dilution depends on the amount, if any, by
which the Subscription Price less fees paid to the Dealer Managers and other
expenses of the Offer represents a discount to NAV on the date new Shares are
issued.
In determining that the Offer was in the best interests of the Fund and
its stockholders, the Board of Directors retained the Dealer Managers to provide
the Fund with financial advisory, marketing and soliciting services related to
the Offer, including the structure, timing and terms of the Offer. In addition
to the foregoing, the Board of Directors considered, among other things, using a
variable pricing versus fixed pricing mechanism, the benefits and drawbacks of
conducting a non-transferable versus a transferable rights offering, the effect
on the Fund if the Offer is under-subscribed and the experience of the Dealer
Managers in conducting rights offerings.
Because their fees are based on the magnitude of the Fund's assets, the
Fund's Investment Manager and Investment Adviser will benefit from the Offer.
See "Management Agreement and
21
Advisory Agreement." It is not possible to state precisely the amount of
additional compensation these entities will receive as a result of the Offer
because it is not known how many Shares will be subscribed for and because the
net proceeds of the Offer will be invested in additional portfolio securities
which will fluctuate in value.
Although the Board of Directors has no present intention of proposing
further rights offerings or further Preferred Stock offerings, the Board may
consider, from time to time, making additional offerings when, in its view,
investment opportunities are presented that lend themselves to the investment of
new funds and further rights offerings or further Preferred Stock offerings
would be in the best interests of the Fund and its stockholders. Any rights
offerings will be made in accordance with the 1940 Act, but may or may not be
made on terms similar to the Offer.
Over-Subscription Privilege
Shares not subscribed for by Record Date Stockholders or Rights Holders
("Excess Shares") will be offered, by means of the Over-Subscription Privilege,
to the Record Date Stockholders who have exercised all exercisable Rights issued
to them and who wish to acquire more than the number of Shares for which the
Rights issued to them are exercisable. Record Date Stockholders should indicate,
on the Subscription Certificate which they submit with respect to the exercise
of the Rights issued to them, how many Excess Shares they are willing to acquire
pursuant to the Over-Subscription Privilege. If sufficient Excess Shares remain,
all Record Date Stockholders over-subscription requests will be honored in full.
If Record Date Stockholder requests for Shares pursuant to the Over-Subscription
Privilege exceed the Excess Shares available, the available Excess Shares will
be allocated pro-rata among Record Date Stockholders who oversubscribe based on
the number of Rights originally issued to such Record Date Stockholders. The
percentage of remaining Shares each over-subscribing Exercising Stockholder may
acquire will be rounded down to result in delivery of whole Shares. 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.
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent, before any Over-Subscription
Privilege may be exercised with respect to any particular beneficial owner, as
to the aggregate number of Rights exercised pursuant to the Primary Subscription
and the number of Shares subscribed for pursuant to the Over-Subscription
Privilege by such beneficial owner and that such beneficial owner's Primary
Subscription was exercised in full. Nominee Holder Over-Subscription Forms and
Beneficial Owner Certification Forms will be distributed to banks, brokers,
trustees and other nominee holders with the Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any Shares
that are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
The Fund has been advised that certain Directors that own shares in the
Fund, who owned _____ shares in the aggregate on the Record Date, intend to
exercise all of the Rights initially issued to them. If additional Shares remain
after all over-subscriptions other than the over-subscriptions submitted by
these Directors are honored in full, such Directors may purchase all or any of
the remaining Shares. If additional Shares do not remain after all
over-subscriptions by Stockholders other than such Directors are honored, then
such Directors will not receive Shares pursuant to the Over-Subscription
Privilege. Rule 144 under the Securities Act of 1933, as amended ("1933 Act"),
generally provides that an "affiliate" of the Fund is entitled to sell, within
any three-month period, a number of shares that does not exceed the
22
greater of 1% of the then outstanding shares of Common Stock or the average
weekly reported trading volume of the Common Stock during the four calendar
weeks preceding the sale. Sales under Rule 144 are also subject to certain
restrictions on the manner of sale, to notice requirements and to the
availability of current public information about the Fund. In addition, any
profit resulting from a Director's sale of shares within a period of less than
six months from the purchases may have to be returned to the Fund.
The Subscription Price
The Subscription Price for the Shares to be issued pursuant to the
Offer will be $____ per Share.
The Fund announced the Offer after the close of trading on the NYSE on
_______, 2002. The net asset value per share of Common Stock at the close of
business on _______, 2002 (the last trading date on which the Fund publicly
reported its net asset value prior to the announcement) and on ____________,
2002 (the last trading date on which the Fund publicly reported its net asset
value prior to the date of this Prospectus) was $_____ and $_____, respectively,
and the last reported sales price of a share of the Fund's Common Stock on the
NYSE on those dates was $_____ and $______, respectively.
Expiration of the Offer
The Offer will expire at 5:00 p.m., New York City time, on [Expiration
Date], unless extended by the Fund. The Rights will expire on the Expiration
Date and thereafter may not be exercised.
Any extension of the Offer will be followed as promptly as practicable
by announcement thereof, and in no event later than 9:00 a.m., New York City
time, on the next business day following the previously scheduled Expiration
Date. Without limiting the manner in which the Fund may choose to make such
announcement, the Fund will not, unless otherwise required by law, have any
obligation to publish, advertise or otherwise communicate any such announcement
other than by making a release to the Dow Jones News Service or such other means
of announcement as the Fund deems appropriate.
Subscription Agent
The subscription agent is [name] ("Subscription Agent"). The
Subscription Agent will receive for its administrative, processing, invoicing
and other services as Subscription Agent, a fee estimated to be approximately
$[______] which includes reimbursement for all out-of-pocket expenses related to
the Offer. The Subscription Agent is also the Fund's transfer agent,
dividend-paying agent and registrar for the Common Stock. Questions regarding
the Subscription Certificates should be directed by mail to [name] [address], or
by telephone to [telephone number] (toll free). STOCKHOLDERS MAY ALSO SUBSCRIBE
FOR THE OFFER BY CONTACTING THEIR BROKER-DEALER, TRUST COMPANY, BANK, OR OTHER
NOMINEE.
Completed Subscription Certificates must be sent together with proper
payment of the Subscription Price for all Shares subscribed for in the Primary
Subscription and the Over-Subscription Privilege (for Record Date Stockholders)
to [name] by one of the methods described below. Alternatively, Notices of
Guaranteed Delivery may be sent by facsimile to (____) ____-______ to be
received by the Subscription Agent prior to 5:00 p.m., New York City time, on
the Expiration Date. Facsimiles should be confirmed by telephone at (____)
____-______. The Fund will accept only properly completed and executed
Subscription Certificates actually received at any of the addresses listed
below, prior to 5:00 p.m., New York City time, on the Expiration Date or by the
close of business on the third business day after the Expiration Date following
timely receipt of a Notice of Guaranteed Delivery. See "Payment for Shares"
below.
23
=====================================================================================================
Subscription Certificate
Delivery Method Address/Number
-----------------------------------------------------------------------------------------------------
By Notice of Guaranteed Delivery Contact your broker-dealer, trust company, bank, or
other nominee to notify the Fund of your intent to
exercise the Rights.
-----------------------------------------------------------------------------------------------------
By First Class Mail Only Aberdeen Global Income Fund, Inc.
(No Overnight /Express Mail) [name of subscription agent]
[address]
-----------------------------------------------------------------------------------------------------
By Hand to New York Delivery Window Aberdeen Global Income Fund, Inc.
Securities Transfer & Reporting Services, Inc.
[name of subscription agent]
[address]
-----------------------------------------------------------------------------------------------------
By Express Mail or Overnight Courier Aberdeen Global Income Fund, Inc.
[name of subscription agent]
[address]
=====================================================================================================
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL
NOT CONSTITUTE VALID DELIVERY.
Information Agent
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
Georgeson Shareholder
Communications, Inc.
17 State Street
New York, NY 10004
Toll Free: (800) ____-_____, Ext. ____
or
Call Collect: (____) _____-______
Stockholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated to
be $34,000, which includes reimbursement for its out-of-pocket expenses related
to the Offer.
Methods for Exercising Rights
Rights are evidenced by Subscription Certificates that, except as
described below under "Foreign Restrictions," will be mailed to Record Date
Stockholders or, if a Stockholder's shares are held by Cede or any other
depository or nominee on their behalf, to Cede or such depository or nominee.
Rights may be exercised by completing and signing the Subscription Certificate
that accompanies this Prospectus and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment in full for the Shares at the
Subscription
24
Price by the Expiration Date. Rights may also be exercised by contacting your
broker, banker or trust company, who can arrange, on your behalf, to guarantee
delivery of payment and delivery of a properly completed and executed
Subscription Certificate pursuant to a Notice of Guaranteed Delivery by the
close of business on the third Business day after the Expiration Date. A fee may
be charged for this service. Completed Subscription Certificates and related
payments must be received by the Subscription Agent prior to 5:00 p.m., New York
City 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. Fractional shares will not be issued upon the exercise of Rights.
Exercising Stockholders Who Are Record Owners. Exercising Stockholders
who are owners of record may choose either option set forth under "Payment for
Shares" below. If time is of the essence, alternative (2) will permit delivery
of the Subscription Certificate and payment after the Expiration Date.
Stockholders Whose Shares Are Held by a Nominee. Stockholders whose
shares of Common Stock are held by a nominee, such as a bank, broker or trustee,
must contact that nominee to exercise their Rights. In that case, the nominee
will complete the Subscription Certificate on behalf of the Stockholder and
arrange for proper payment by one of the methods set forth under "Payment for
Shares" below.
Nominees. Nominees who hold shares of Common Stock for the account of
others should notify the respective beneficial owners of the shares as soon as
possible to ascertain the beneficial owners' intentions and to obtain
instructions with respect to the Rights. If the beneficial owner so instructs,
the nominee should complete the Subscription Certificate and submit it to the
Subscription Agent with the proper payment as described below under "Payment for
Shares" below.
All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
subscription 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 right to reject
any or all subscriptions not properly submitted or the acceptance of which
would, in the opinion of Fund's counsel, be unlawful.
Payment for Shares
Stockholders who wish to acquire Shares pursuant to the Offer may
choose between the following methods of payment:
1. An Exercising Rights Holder may send the Subscription
Certificate together with payment for the Shares acquired in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege (for Record Date Stockholders) to the Subscription
Agent based on the Subscription Price of $____ per Share. To be accepted, the
payment, together with the executed Subscription Certificate, must be received
by the Subscription Agent at one of the Subscription Agent's offices set forth
above, prior to 5:00 p.m., New York City time, on the Expiration Date. The
Subscription Agent will deposit all funds received by it for the purchase of
Shares into a segregated interest-bearing account (the interest from which will
accrue to the benefit of the Fund) pending proration and distribution of Shares.
A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR
CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
ABERDEEN GLOBAL INCOME FUND, INC. AND MUST ACCOMPANY A PROPERLY COMPLETED AND
EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE
ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL COLLECTION OF CHECKS BY
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, STOCKHOLDERS ARE
25
STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR
CASHIER'S CHECK OR MONEY ORDER.
2. Alternatively, an Exercising Rights Holder may acquire
Shares, and a subscription will be accepted by the Subscription Agent if, prior
to 5:00 p.m., New York City time, on the Expiration Date, the Subscription Agent
has received a Notice of Guaranteed Delivery by facsimile or otherwise from a
financial institution that is a member of the Securities Transfer Agents
Medallion Program, the Stock Exchange Medallion Program or the NYSE Medallion
Signature Program guaranteeing delivery of (i) payment of the Subscription Price
of $____ per Share for the Shares subscribed for in the Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription Privilege
(for Record Date Stockholders), and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice of
Guaranteed Delivery unless a properly completed and executed Subscription
Certificate and full payment for the Shares is received by the Subscription
Agent by the close of business on ___________, 2002, the third business day
after the Expiration Date.
On a date within eight business days following the Expiration Date
("Confirmation Date"), the Subscription Agent will send to each Exercising
Rights Holder (or, if shares of Common Stock are held by Cede or any other
depository or nominee, to Cede or such other depository or nominee) a
confirmation showing (i) the number of Shares purchased pursuant to the Primary
Subscription and (ii) the number of Shares, if any, acquired pursuant to the
Over-Subscription Privilege (for Record Date Stockholders). All payments by an
Exercising Rights Holder must be in U.S. dollars by money order or check drawn
on a bank or branch located in the United States and payable to ABERDEEN GLOBAL
INCOME FUND, INC.
The Subscription Agent will deposit all funds received by it prior to
the final payment date into a segregated interest-bearing account (which
interest will accrue to the benefit of the Fund) pending proration and
distribution of the Shares.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. If a
holder of Rights who subscribes for Shares pursuant to the Primary Subscription
or Over-Subscription Privilege (for Record Date Stockholders) does not make
payment of any amounts due by the Expiration Date or the date guaranteed
payments are due under a notice of guaranteed delivery, the Subscription Agent
reserves the right to take any or all of the following actions: (i) find other
Record Date Stockholders for such subscribed and unpaid for Shares; (ii) apply
any payment actually received by it toward the purchase of the greatest whole
number of Shares which could be acquired by such holder upon exercise of the
Primary Subscription and/or Over-Subscription Privilege, and/or (iii) exercise
any and all other rights or remedies to which it may be entitled, including,
without limitation, the right to set off against payments actually received by
it with respect to such subscribed Shares.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole
26
discretion may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as the Fund determines in its sole discretion. The Subscription Agent
will not be under any duty to give notification of any defect or irregularity in
connection with the submission of Subscription Certificates or incur any
liability for failure to give such notification.
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR
SUBSCRIPTION AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION
AGENT, EXCEPT AS PROVIDED BELOW UNDER "NOTICE OF NAV DECLINE."
Sale of Rights
The Rights are Transferable until the Expiration Date. The Rights will
be listed for trading on the NYSE, subject to notice of issuance. The Fund will
use its best efforts to ensure that an adequate trading market for the Rights
will exist, although no assurance can be given that a market for the Rights will
develop. Trading in the Rights on the NYSE is expected to be conducted on a
"when issued" basis beginning on or about __________, 2002, until and including
on or about ___________, 2002, and thereafter are expected to trade on a
"regular-way" basis until and including ____________, 2002, the last business
day prior to the Expiration Date. Exercising Rights Holders are encouraged to
contact their broker, bank or financial advisor for more information about
trading of the rights.
Sales Through Subscription Agent and Dealer Managers. Record Date
Stockholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through or to the Dealer
Managers. Subscription Certificates representing the Rights to be sold through
or to the Dealer Managers must be received by the Subscription Agent on or
before ____________, 2002, (or if the offer is extended, until two business days
prior to the Expiration Date). Upon the timely receipt by the Subscription Agent
of appropriate instructions to sell Rights, the Subscription Agent will ask the
Dealer Managers either to purchase or to use its best efforts to complete the
sale and the Subscription Agent will remit the proceeds of sale to the selling
Record Date Stockholder. If the Rights can be sold, sales of such Rights will be
deemed to have been effected at the weighted-average price received by the
Dealer Managers on the day such Rights are sold. The sale price of any Rights
sold to the Dealer Managers will be based upon the then current market price for
the Rights. The Dealer Managers will also attempt to sell all Rights which
remain unclaimed as a result of Subscription Certificates being returned by the
postal authorities to the Subscription Agent as undeliverable as of the fourth
business day prior to the Expiration Date. The Subscription Agent will hold the
proceeds from those sales for the benefit of such non-claiming Record Date
Stockholders until such proceeds are either claimed or revert to the state.
There can be no assurance that the Dealer Managers will purchase or be able to
complete the sale of any such Rights and neither the Fund nor the Dealer
Managers has guaranteed any minimum sales price for the Rights. If a Record Date
Stockholder does not utilize the services of the Subscription Agent and chooses
to use another broker-dealer or other financial institution to sell Rights, then
the other broker dealer or financial institution may charge a fee to sell the
Rights.
Other Transfers. The Rights evidenced by a Subscription Certificate may
be transferred in whole by endorsing the Subscription Certificate for transfer
in accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights) may
be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register such
portion of the Rights evidenced thereby in the name of the transferee and to
issue a new Subscription Certificate to the transferee evidencing such
transferred Rights. In such event, a new Subscription Certificate evidencing the
balance of the Rights, if any, will be issued to the Record Date Stockholder or,
if the Record Date Stockholder so instructs, to an additional
27
transferee. The signature on the Subscription Certificate must correspond with
the name as written upon the face of the Subscription Certificate in every
particular, without alteration or enlargement, or any change. A signature
guarantee must be provided by an eligible financial institution as defined in
Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended ("1934 Act"),
subject to the standards and procedures adopted by the Fund.
Record Date Stockholders wishing to transfer all or a portion of their
Rights should allow at least five business days prior to the Expiration Date
for: (i) the transfer instructions to be received and processed by the
Subscription Agent; (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained Rights, if any; and (iii) the
Rights evidenced by such new Subscription Certificate to be exercised or sold by
the recipients thereof. Neither the Fund nor the Subscription Agent nor the
Dealer Managers shall have any liability to a transferee or transferor of Rights
if Subscription Certificates are not received in time for exercise or sale prior
to the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer
Managers (which will be paid by the Fund), all commissions, fees and other
expenses (including brokerage commissions and transfer taxes) incurred or
charged in connection with the purchase, sale or exercise of Rights will be for
the account of the transferor of the Rights, and none of such commissions, fees
or expenses will be paid by the Fund, the Subscription Agent or the Dealer
Managers.
The Fund anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription (but not the
Over-Subscription Privilege) may be effected through, the facilities of DTC.
Rights exercised through DTC are referred to as "DTC Exercised Rights." Record
Date Stockholders of DTC Exercised Rights may exercise the Over-Subscription
Privilege in respect of such DTC Exercised Rights by properly executing and
delivering to the Subscription Agent, at or prior to 5:00 p.m., New York City
time, on the Expiration Date, a Nominee Holder Over-Subscription Subscription
Certificate or a substantially similar form satisfactory to the Subscription
Agent, together with payment of the Subscription Price for the number of Shares
for which the Over-Subscription Privilege is to be exercised.
Foreign Restrictions
Subscription Certificates will not be mailed to Record Date
Stockholders whose record addresses are outside the United States (the term
"United States" includes the states, the District of Columbia, and the
territories and possessions of the United States) ("Foreign Record Date
Stockholders"). Foreign Record Date Stockholders will receive written notice of
he Offer. The Rights to which such Subscription Certificates relate will be held
by the Subscription Agent for such Foreign Record Date Stockholders' accounts
until instructions are received to exercise the Rights. If no instructions have
been received by 5:00 p.m., New York City time on __________, 2002, three
business days prior to the Expiration Date, the Rights of those Foreign Record
Date Stockholders will be transferred by the Subscription Agent to the Dealer
Managers who will either purchase the Rights or use their best efforts to sell
the Rights. The net proceeds, if any, from the sale of those Rights by or to the
Dealer Managers will be remitted to Foreign Record Date Stockholders.
Notice of NAV Decline
The Fund, as required by the SEC's registration form, will suspend the
Offer until it amends this Prospectus if, subsequent to the date of this
Prospectus, the Fund's NAV declines more than 10% from its NAV as of that date.
Accordingly, the Expiration Date would be extended and Fund would notify Record
Date Stockholders of the decline and permit Exercising Rights Holders to cancel
their exercise of Rights.
28
Delivery of Stock Certificates
Participants in the Fund's Dividend Reinvestment and Cash Purchase Plan
("Plan") will have any Shares that they acquire pursuant to the Offer credited
to their Stockholder dividend reinvestment accounts in the Plan. Stockholders
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 Shares that they
acquire credited to the account of Cede or the other depository or nominee. With
respect to all other Stockholders, stock certificates for all Shares acquired
will be mailed after payment for all the Shares subscribed for has cleared,
which may take up to 15 days from the date of receipt of the payment.
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 will not be entitled to the distribution to be declared to Stockholders of
record on [month day, year] which is payable in [month year]. Whether a
Stockholder is entitled to the distribution to be declared to Stockholders of
record on [month day, year] which is payable in [month year] will depend on the
date Shares are actually issued to the Stockholder.
Federal Income Tax Consequences of the Offer
For Federal income tax purposes, neither the receipt nor the exercise
of the Rights by Stockholders will result in taxable income to holders of Common
Stock, and no loss will be realized if the Rights expire without exercise.
A Record Date Stockholder's basis in a 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 of the Shares with respect to which the Right was
distributed, or (ii) the Record Date Stockholder elects, in his or her Federal
income tax return for the taxable year in which the Right is received, to
allocate part of the basis of the Shares to the Right. If either of clauses (i)
and (ii) is applicable, then if the Right is exercised, the Record Date
Stockholder will allocate his or her basis in the Shares with respect to which
the Right was distributed between the Shares and the Right in proportion to the
fair market values of each on the date of distribution.
The holding period of a Right received by a Record Date Stockholder
includes the holding period of the shares of Common Stock with regard to which
the Right is issued. If the Right is exercised, the holding period of the Shares
acquired begins on the date the Right is exercised.
If a Right is sold, a gain or loss will be realized by the holder in an
amount equal to the difference between the basis of the Right sold and the
amount realized on its disposition.
A Record Date Stockholder'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 Record Date Stockholder's basis in the Right, if any, and the
Subscription Price per Share. A Record Date Stockholder's gain or loss
recognized upon a sale of a Share acquired upon the exercise of a Right will be
capital gain or loss (assuming the Share was held as a capital asset at the time
of sale) and will be long-term capital gain or loss if the Share is held for
more than one year.
The foregoing is a general summary of the material U.S. federal income
tax consequences of the Offer under the provisions of the U.S. Internal Revenue
Code of 1986, as amended ("Code"), and Treasury regulations presently in effect
that are generally applicable to Record Date Stockholders that are United States
persons within the meaning of the Code, and does not cover foreign, state or
local taxes. The Code and Treasury regulations are subject to change by
legislative or administrative action, which
29
may be retroactive. Exercising Rights Holders should consult their tax advisors
regarding specific questions as to foreign, Federal, state or local taxes.
ERISA Considerations
Stockholders who are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), Keogh or H.R. 10 plans of self-employed
individuals and individual retirement accounts (collectively, "Retirement
Plans") should be aware that additional contributions of cash to a Retirement
Plan (other than rollover contributions or trustee-to-trustee transfers from
other Retirement Plans) in order to exercise Rights would be treated as
contributions to the Retirement Plan and, when taken together with contributions
previously made, may result in, among other things, excise taxes for excess or
nondeductible contributions. In case of Retirement Plans qualified under Section
401(a) of the Code and certain other Retirement Plans, additional cash
contributions could cause the maximum contribution limitations of Section 415 of
the Code or other qualification rules to be violated. It may also be a
reportable distribution and there may be other adverse tax and ERISA
consequences if Rights are sold or transferred by a Retirement Plan.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under 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 is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Code contain prohibited transaction rules that may impact the exercise of
Rights. Due to the complexity of these rules and the penalties for
noncompliance, Retirement Plans should consult with their counsel and other
advisers regarding the consequences of their exercise of Rights under ERISA and
the Code.
USE OF PROCEEDS
If [# of shares] Shares are sold at the Subscription Price of
$________, the net proceeds of the Offer are estimated to be approximately
$____________, after deducting commissions and expenses payable by the Fund
estimated at approximately $___________. The Investment Manager and Investment
Adviser anticipate that investment of the net proceeds in Global Debt
Securities, in accordance with the Fund's investment objective and policies,
will take approximately one to four months from their receipt by the Fund,
depending on market conditions and the availability of appropriate securities.
See "The Offer - Purpose of the Offer," "Investment Objective and Policies" and
"Investment Restrictions."
Pending such investment, the proceeds will be invested in U.S.
government securities and other high-quality, short-term money market
instruments, which is not in accordance with the Fund's primary investment
objective. The Fund invests in various developing and developed markets whose
liquidity may delay the investment of the proceeds in a manner consistent with
the Fund's primary investment objective. There is a risk that the Fund will not
be able to invest all of the proceeds within four months. To the extent that the
Fund is not able to invest the proceeds within four months, the proceeds will
continue to be invested in U.S. government securities. As a result of this
short-term investment of the proceeds, a lower yield may be realized.
30
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was incorporated under the laws of the
State of Maryland on June 28, 1991, under the name "The First Commonwealth Fund,
Inc." Effective May 1, 2001, the Fund's name was changed to "Aberdeen
Commonwealth Income Fund, Inc." to reflect the fact that the Fund's Investment
Manager and Investment Adviser had been acquired by Aberdeen Asset Management
PLC in 2000. Effective July 1, 2002, the Fund's name was changed to "Aberdeen
Global Income Fund, Inc." to comply with the requirements of Rule 35d-1 under
the 1940 Act regarding investment company names.
The Fund commenced operations on February 28, 1992, upon the closing of
an initial public offering of 7,850,000 shares of its Common Stock. The net
proceeds for that offering were approximately $109 million after payment of
organizational and offering expenses and the underwriting discount. On April 9,
1992, 1,159,200 additional shares of Common Stock were issued and sold by the
Fund pursuant to the underwriters' exercise of their over-allotment option. The
net proceeds of such sale were approximately $16.3 million after payment of the
underwriting discount. On July 30, 1992, the Fund issued 600 shares of Series
W-7 Preferred Stock with an aggregate liquidation preference of $30 million. The
net proceeds of that offering were approximately $29,220,205 million after
payment of offering expenses and the underwriting discount. On December 3, 1996,
by means of a stock split, 600 additional shares of the Series W-7 Preferred
Stock were issued and the liquidation preference per share was decreased from
$50,000 per share to $25,000. Thus, there are currently 1,200 shares of Series
W-7 Preferred Stock, with an aggregate liquidation preference of $30 million,
outstanding.
Description of Common Stock
The Fund is authorized to issue 300,000,000 shares of Common Stock.
Each share has equal voting, dividend, distribution and liquidation rights. The
shares outstanding and the Shares offered hereby, when issued and paid for
pursuant to the terms of the Offer, will be fully paid and non-assessable.
Shares of Common Stock are not redeemable and have no preemptive, conversion or
cumulative voting rights.
The number of shares of Common Stock outstanding as of July 31, 2002
was 9,266,209. The number of shares outstanding as of July 31, 2002 adjusted to
give effect to the Offer, assuming that all Rights are exercised and the
applicable Shares issued, would be _______.
The Fund's shares are publicly held and listed and traded on the NYSE.
Prior to March 8, 2000, the NAV of the Fund was determined on the last business
day of each week. On March 8, 2000, the Fund began determining its NAV on a
daily basis. The following table sets forth for the quarters indicated the
highest and lowest Friday (or other last business day of a week) closing prices
on the NYSE per share of Common Stock and the NAV per share and the premium or
discount from NAV on the date of each of the high and low market prices for
periods through March 8, 2000. For periods ending after March 8, 2000, the table
sets forth for the quarters indicated the highest and lowest daily closing
prices on the NYSE per share of Common Stock and the NAV per share and the
premium or discount from NAV on the date of each of the high and low market
prices. The table also sets forth the number of shares traded on the NYSE during
the respective quarter.
31
NAV Per Share
on NYSE Reported
Date of Market Price Per Share
Market Price and Related Premium (+)/
High and Low/(1)/ Discount (-)/(2)(3)/ NYSE
------------------ ------------------------------------
Quarter Ended High Low High Low Volume
------------- -------- -------- ------------------ ---------------- --------------
January 31, 2000 ..... 12.27 12.09 10.1875/(16.97) 9.1875/(24.01) 1,017,500
April 30, 2000 ....... 11.74 11.36 9.6250/(18.01) 9.1875/(19.12) 845,200
July 31, 2000 ........ 11.15 10.93 9.5625/(14.24) 8.5625/(21.66) 719,800
October 31, 2000 ..... 10.91 10.28 9.3750/(14.07) 8.8125/(14.28) 478,800
January 31, 2001 ..... 10.64 10.37 9.5000/(10.71) 8.2500/(20.44) 896,530
April 30, 2001 ....... 10.80 10.01 9.5000/(12.04) 8.7800/(12.29) 652,100
July 31, 2001 ........ 9.82 9.81 8.9500/(8.86) 8.6000/(12.33) 976,900
October 31, 2001 ..... 10.13 9.83 9.1900/(9.27) 8.7900/(10.58) 1,213,580
January 31, 2002 ..... 9.86 9.62 9.0500/(8.22) 8.6300/(10.29) 955,500
April 30, 2002 ....... 9.70 9.39 8.8900/(8.35) 8.6400/(7.99) 784,900
July 31, 2002 ........ 10.30 9.68 10.4000/(0.97) 8.8800/(8.26) 2,600,100
-----------------------
(1) Based on the Fund's computations.
(2) Highest and lowest Friday (or other last business day of the week) closing
market price per share as reported on the NYSE for periods through March 8,
2000. Highest and lowest daily closing market price per share as reported
on the NYSE for periods ending after March 8, 2000.
(3) "Related Premium(+)/Discount(-)" represents the premium or discount from
NAV of the shares on the date of the respective high and low market price
for the respective quarter.
On [Record Date], the per share NAV was $____ and the share market
price was $____, representing a ____% discount from such NAV.
The Fund's shares have traded in the market above, at and below NAV
since the commencement of the Fund's operations. The Fund cannot determine the
reasons for the Fund's shares trading at a premium or discount to NAV, nor can
the Fund predict whether its shares will trade in the future at a premium or
discount to NAV, and if so, the level of any premium or discount. Shares of
closed-end investment companies frequently trade at a discount from NAV.
It is frequently the case that Fund shares trade at a discount to net
asset value. In an effort to minimize the spread between market value and net
asset value that may otherwise exist, on March 1, 2001, the Board of Directors
approved a stock repurchase program. The stock repurchase program allows the
Fund to repurchase up to 10% of its outstanding Common Stock in the open market
during any 12-month period, if and when the discount to net asset value is at
least 10%. Through July 31, 2002, there have been no share repurchases through
this program.
When the Fund repurchases its shares for a price below their net asset
value, the net asset value of the shares that remain outstanding will be
enhanced, but this does not necessarily mean that the market price of those
outstanding shares will be affected, either positively or negatively. Any
acquisition of shares by the Fund will decrease the total assets of the Fund and
therefore may increase the Fund's expense ratio. If the Fund must liquidate a
portion of its investment portfolio in connection with a share repurchase, such
liquidation might be at a time when independent investment judgment would not
dictate such action, increasing the Fund's overall portfolio turnover and making
it more difficult for the Fund to achieve its investment objective.
32
Description of Preferred Stock
The Fund currently has outstanding an aggregate of 1,200 shares of
Preferred Stock. The Preferred Stock has been issued in one series, Series W-7.
The Series W-7 Preferred Stock was issued on July 30, 1992. The shares of
Preferred Stock are senior securities having priority over the shares of Common
Stock as to distribution of assets and payment of dividends. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Fund, the
holders of Preferred Stock are entitled to receive a preferential liquidating
distribution of $25,000 per share ("Liquidation Preference"), plus accrued and
unpaid dividends (whether or not declared), before any payment is made to
holders of Common Stock. The average market value of a share of Preferred Stock
has been equal to the Liquidation Preference. The following tables set forth
certain information relating to the Preferred Stock.
Preferred Stock, Series W-7
Total Amount of Asset Coverage Per Liquidation
Preferred Stock $25,000 Share of Preference Per
Period Ended Outstanding /(1)/ Preferred Stock /(2)/ $25,000 Share /(3)//(4)/
------------ --------------- ------------------- ------------------------
October 31, 1992 ............ $30,000,000 498% $25,000
October 31, 1993 ............ $30,000,000 514% $25,000
October 31, 1994 ............ $30,000,000 473% $25,000
October 31, 1995 ............ $30,000,000 505% $25,000
October 31, 1996 ............ $30,000,000 542% $25,000
October 31, 1997 ............ $30,000,000 530% $25,000
October 31, 1998 ............ $30,000,000 504% $25,000
October 31, 1999 ............ $30,000,000 475% $25,000
October 31, 2000 ............ $30,000,000 415% $25,000
October 31, 2001 ............ $30,000,000 408% $25,000
April 30, 2002 .............. $30,000,000 399% $25,000
-------------------------
(1) Based on the number of shares of Preferred Stock outstanding multiplied
by the Liquidation Preference per share.
(2) Asset coverage per share of Preferred Stock is derived by subtracting the
aggregate Liquidation Preference of all of the series of Preferred Stock
outstanding from the total assets of the Fund less (i) all liabilities
and indebtedness not represented by the Preferred Stock and (ii) any
accrued but unpaid dividends on the Preferred Stock as at the end of the
fiscal periods indicated. This sum is then divided by the number of
shares of Preferred Stock outstanding.
(3) Plus accrued and unpaid dividends, if any.
(4) The liquidation preference as of October 31, 1996 was $50,000 per share
of Preferred Stock. Effective December 3, 1996, by means of a stock
split, the liquidation preference of Preferred Stock was reduced to
$25,000 per share and an additional 600 shares of the Series W-7
Preferred Stock were issued.
The dividend rates on the outstanding Preferred Stock are established
through an auction process. The dividend rates on the Series W-7 shares are set
every seven days. Generally, the dividend rate has represented a discount from
the 30-day commercial paper rate. As of July 31, 2002, the annual dividend rate
on the Series W-7 Preferred Stock was 1.80%. At this rate, the annual return the
Fund's portfolio must experience (net of expenses) in order to cover dividend
payments on the Series W-7 Preferred Stock is 2.05%.
As mentioned above, a typical dividend period for the Fund consists of
seven days. Under certain market conditions, however, the Fund may declare a
Special Dividend Period, consisting of more than seven days (e.g., a 28-day
dividend period). In order for the Fund to declare a Special Dividend Period, it
must first obtain permission from its Auction Agent and those broker-dealers who
have entered into Broker-Dealer Agreements with the Auction Agent with respect
to the Fund. Additionally, the Fund must give notice to the holders of the
Preferred Stock, and must have written confirmation from Moody's
33
and S&P that such a Special Dividend Period would not impair the then-current
ratings of the Preferred Stock. As of October 2, 2002, the Fund had declared a
Special Dividend Period which is scheduled to end October 30, 2002. Although the
Fund anticipates that it will continue to declare successive Special Dividend
Periods, each for 28 days, for the next six to 24 months, there can be no
assurance that the Fund will seek a Special Dividend Period at any given time or
that, if a Special Dividend Period is sought by the Fund, the Auction Agent and
each of the applicable broker-dealers will continue to grant the Fund permission
to declare such Special Dividend Periods.
The Fund may use interest rate swaps to hedge the Fund's liability with
respect to the Preferred Stock. At present, the Fund has been authorized by its
Board of Directors to hedge up to one-third of the Fund's liability with respect
to the Preferred Stock. See "Portfolio Securities - Derivative Securities -
Swaps," "Risk Factors and Special Considerations - Use of Derivatives" and "Risk
Factors and Special Considerations - Preferred Stock - Leverage Risk."
The following table is designed to illustrate the effect on the return to
a holder of the Fund's Common Stock of the leverage obtained by the issuance of
the Preferred Stock, assuming hypothetical annual returns on the Fund's
portfolio of minus 10 to plus 10 percent. As can be seen, leverage generally
increases the returns to Stockholders when portfolio returns are positive and
decreases returns when the portfolio returns are negative. Actual returns may be
greater or less than those appearing in the table and may be enhanced or
diminished by fluctuations in foreign currency. See "Risk Factors and Special
Considerations - Preferred Stock - Leverage Risk."
Assumed Portfolio Return (net of expenses) ........... -10% -5% 0% 5% 10%
Corresponding Common Stock Return(1) ................. _____% _____% _____% _____% _____%
------------
(1) In order to compute "Corresponding Common Stock Return," the "Assumed
Portfolio Return" is multiplied by the total value of Fund assets as of the
beginning of the fiscal year (November 1, 2002) to obtain an assumed return
to the Fund. This rate is then reduced by the value of Preferred Stock
dividends that would be paid during the year ($_________) based on the
dividend rates in effect at the beginning of the fiscal year for Series
W-7, ____%) in order to determine the return available to holders of the
Fund's Common Stock. Return available to holders of the Fund's Common Stock
is then divided by the value of the Fund's net assets attributable to
holders of Common Stock as of the beginning of the fiscal year
($__________) to determine "Corresponding Common Stock Return."
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to provide high current income by
investing primarily in fixed-income securities denominated in the Commonwealth
Currencies. As a secondary investment objective, the Fund seeks capital
appreciation, but only when consistent with its principal investment objective.
The Fund's investment objectives, the Fund's policies with respect to the credit
quality of its assets set forth below and the limitations set forth below in
"Investment Restrictions" are fundamental policies that may not be changed
without the approval of the holders of a majority of the outstanding shares of
the Common Stock and the Preferred Stock, voting together as a single class, as
well as by the holders of a majority of the outstanding shares of the Fund's
Preferred Stock voting as a separate class. A majority vote, as defined by the
1940 Act, means the affirmative vote of the lesser of (i) 67% of the relevant
shares represented at a meeting at which more than 50% of such shares are
represented, or (ii) more than 50% of the relevant shares.
For as long as the name of the Fund remains Aberdeen Global Income Fund,
Inc., it shall be the policy of the Fund normally to invest at least 80% of its
net assets plus the amount of any borrowings for investment purposes, in debt
securities. This 80% investment policy is a non-fundamental policy of the Fund
and may be changed by the Board of Directors upon 60 days' prior written notice
to stockholders.
34
The Investment Manager will select fixed-income securities which, in the
Investment Manager's judgment, will achieve the Fund's investment objectives.
The Investment Manager will base such selections primarily upon the
recommendation of the Investment Adviser. In recommending and selecting
investments for the Fund, the Investment Adviser's personnel will draw on their
substantial experience in managing portfolios with investments in debt
securities traded in the Commonwealth Countries, Developed Markets and Emerging
Markets.
Except in anticipation of dividend or other payments to be made in U.S.
dollars, it is expected that normally at least 65% of the Fund's total assets
will be invested in a portfolio of debt securities denominated in the
Commonwealth Currencies, namely, the Australian dollar, the Canadian dollar, the
New Zealand dollar and the Pound Sterling or any successor currencies. The Fund
will, under normal circumstances, invest in debt securities denominated in at
least three of these currencies and will not hold more than 50% of its assets in
any one Commonwealth Currency.
The Fund may invest the balance of its assets (1) in the securities of
Developed Market and/or Emerging Market issuers, including securities issued by
Developed Market or Emerging Market governmental entities, as well as by banks,
companies and other entities which are located in Developed Market or Emerging
Market countries, whether or not denominated in the currency of the Developed
Market or Emerging Market country, and (2) in debt securities of other issuers,
denominated in, or linked to, the currency of a Developed Market or Emerging
Market country, including securities issued by supranational issuers, such as
The World Bank, and derivative debt securities that replicate, or substitute
for, the currency of a Developed Market or Emerging Market country. The maximum
exposure to any one Developed Market country or currency is limited to 25% of
the Fund's total assets. The maximum exposure to any Emerging Market country or
currency is limited to 15% of the Fund's total assets. "Developed Markets" are
those countries contained in the Salomon Smith Barney World Government Bond
Index, excluding the Commonwealth Countries. See Appendix C for a list of the
countries comprising the Salomon Smith Barney World Government Bond Index as of
March 31, 2002. "Emerging Markets" are those countries that are not Developed
Markets or Commonwealth Countries.
The Fund may, with respect to the Global Debt Securities portion of its
portfolio, use derivatives to manage currency and interest rate risk and to
replicate or as a substitute for Physical Securities. The Fund may also use
derivatives with respect to its investments denominated in Commonwealth
Currencies to manage interest rate risk through investing in exchange-traded
interest rate derivatives.
Subject to the limitations set forth in Section 12(d) of the 1940 Act,
the Fund may invest up to 10% of its total assets in equity securities issued by
other investment companies whose securities are registered under the 1940 Act
and whose investment objective is to invest primarily in fixed-income
securities.
The market value weighted average of the Fund's investments (or the
issuers of those investments) will be rated not less than A2 by Moody's, or A by
S&P, or comparably rated by another appropriate nationally or internationally
recognized rating agency, or, if unrated, judged by the Investment Manager to be
of equivalent quality. Up to 15% of the Fund's investments (or the issuers of
those investments) may be rated below investment grade at the time of
investment; that is rated below Baa3 by Moody's or BBB- by S&P, or comparably
rated by another appropriate nationally or internationally recognized rating
agency, or if unrated, judged by the Investment Manager to be of equivalent
quality. All of the Fund's investments (or the issuers of those investments)
must be rated, at the time of investment, B3 or better by Moody's, or B- or
better by S&P, or comparably rated by another appropriate nationally or
internationally recognized rating agency, or if unrated, judged by the
Investment Manager to be of equivalent quality.
35
The Fund will not concentrate investments in any one industry except that
the Fund will concentrate, under normal market conditions, more than 25% of its
assets in debt securities issued or guaranteed by the governments, territories,
provinces and states of Australia, Canada, New Zealand and the United Kingdom
taken as a group (and their instrumentalities and agencies, including
government-owned entities). The Fund believes it is appropriate to treat all of
the governments of the four Commonwealth Countries as a separate industry or
group of related industries because of the commonality of economic and political
characteristics and risk levels among the four Commonwealth Countries, including
similar constitutional, legal and financial systems.
During periods when, in the Investment Manager's judgment, changes in the
markets of Australia, Canada, New Zealand, or the United Kingdom or other
economic conditions warrant, or to meet liquidity or distribution requirements,
the Fund may invest without limit in U.S. Government securities and short-term
debt obligations of U.S. banks and corporations rated not less than Aa or
Prime-2 by Moody's or AA or A-2 by S&P for temporary defensive purposes.
Although Prime-2 and A-2 ratings denote issuers with a strong (Moody's) or
satisfactory (S&P) ability to repay short-term debt in a timely manner, the
relative degree of safety is not as high as the very highest rating categories.
In addition, the Fund may enter into repurchase agreements and lending
agreements involving these securities.
PORTFOLIO SECURITIES
The principal types of debt securities in which the Fund is permitted to
invest include those described below. The list is not exclusive, but is
indicative of the kinds of securities which the Fund's investment objectives,
policies and restrictions permit it to buy.
Commonwealth Debt Securities
With respect to the portion of the Fund's portfolio denominated in the
Commonwealth Currencies, the fixed income securities in which the Fund may
invest consist of debt securities issued or guaranteed by the governments,
territories, provinces or states of Australia, Canada, New Zealand and the
United Kingdom (and their instrumentalities and agencies, including
government-owned entities), secured and unsecured notes, bills, bonds,
certificates of deposit, debentures and other debt obligations of private
issuers including without limitation, corporations and banks, mortgage-backed
securities and debt securities offered in the Euromarkets.
Australian Governmental Entities. The Fund is permitted to invest in
Australian government and treasury notes and state government and
semi-government bonds and notes. Australian government bonds and treasury notes
represent the obligations of the government of Australia and are sold through
public tenders. Bonds have maturities up to approximately 13 years while notes
are issued in maturities of seven, 13 and 26 weeks. The Australian government
also guarantees as to payment of principal and interest similar debt obligations
issued by its instrumentalities. State government and semi-government bonds and
notes are issued by various states and state instrumentalities and, in the case
of state instrumentalities, are guaranteed by the applicable state government.
Maturities range from less than one year to approximately 20 years. Federal and
state government debt securities are frequently listed on the stock exchanges
but most trading is by dealers in an active public secondary market.
Canadian Governmental Entities. The Fund is permitted to invest in
Canadian government notes and provincial government bonds and notes. Canadian
government bonds and notes represent the obligations of the government of Canada
and are sold through public tenders. Bonds have maturities up to 30 years. The
Canadian government also guarantees as to payment of principal and interest
similar debt obligations issued by semi-sovereign Canadian entities. Provincial
government bonds and notes are
36
issued by various provinces and provincial instrumentalities and, in the case of
provincial instrumentalities, direct obligations of, or fully guaranteed by, the
full faith and credit of the applicable provincial government. Maturities range
from less than one year to 30 years. Federal and provincial government debt
securities are frequently listed on the stock exchanges but most trading is by
dealers in an active public secondary market.
New Zealand Governmental Entities. The Fund is permitted to invest in New
Zealand government and treasury notes and state government and semi-government
bonds and notes. New Zealand government bonds and treasury notes represent the
obligations of the government of New Zealand and are sold through public
tenders. Bonds have maturities up to 10 years. The New Zealand government also
guarantees as to payment of principal and interest similar debt obligations
issued by its instrumentalities. State government and semi-government bonds and
notes are issued by various states and state instrumentalities and, in the case
of state instrumentalities, are guaranteed by the applicable state government.
Maturities range from less than one year to 15 years. Federal and state
government debt securities are frequently listed on the stock exchanges but most
trading is by dealers in an active public secondary market.
United Kingdom Governmental Entities. The Fund is permitted to invest in
securities issued or guaranteed by the government of the United Kingdom or any
semi-sovereign United Kingdom entity. United Kingdom government bonds and notes
represent the obligations of the government of the United Kingdom and are sold
through public tenders. Bonds have maturities up to approximately 30 years. The
government also guarantees as to payment of principal and interest similar debt
obligations issued by its instrumentalities. United Kingdom government debt
securities are frequently listed on the stock exchanges but most trading is by
dealers in an active public secondary market.
Commonwealth Commercial Banks. The Fund is permitted to invest in bills
of exchange, certificates of deposit and promissory notes issued or guaranteed,
as to payment of principal and interest, by commercial banks in the Commonwealth
Countries. Commonwealth commercial banks are generally comparable to U.S. banks
and are subject to regulation by applicable Commonwealth government authorities.
The Investment Manager and Investment Adviser do not believe that there are any
special risks associated with these securities arising out of the fact that they
are issued by banks. Bills of exchange are negotiable instruments, issued to
finance current transactions, which generally mature within six months and
which, are accepted or endorsed by a commercial bank and thus carry the bank's
credit. Certificates of deposit are negotiable instruments issued by commercial
banks with maturities ranging from a few days to several years. Promissory notes
are negotiable instruments endorsed and therefore guaranteed by a commercial
bank or backed by a bank letter of credit as to payment of principal and
interest. Maturities generally range up to 180 days. Bank bills, certificates of
deposit and promissory notes are usually issued at a discount from face value
and are traded by dealers in an active public secondary market.
Companies. The Fund is permitted to invest in publicly-traded notes and
debentures or bills of exchange issued or guaranteed as to the payment of
principal and interest by companies domiciled in a Commonwealth Country, whether
or not guaranteed or backed by a Commonwealth commercial bank. These securities
have maturities generally ranging from less than one year to five years and are
traded by dealers in an active public secondary market.
Other Debt Securities including Global or Eurobonds Denominated in a
Commonwealth Currency. Subject to its investment policy of investing at least
65% of its assets in debt securities denominated in the Commonwealth Currencies,
the Fund is permitted to invest in debt securities denominated in the
Commonwealth Currencies, similar in nature to those described above, regardless
of the domicile of the issuers. Thus, the Fund is permitted to invest in
Commonwealth Currency-
37
denominated global or Eurobonds that expose the Fund to the interest rate
structure of one or more of the Commonwealth Countries and which are traded by
reference to similar debt securities of issuers domiciled in one or more of the
Commonwealth Countries. The latter securities are usually issued in the
Eurodollar market by multi-national banks and companies which may have
operations in a Commonwealth Country.
Global Debt Securities
Global Debt Securities include (1) securities of Developed Market and/or
Emerging Market issuers, including securities issued by Developed Market or
Emerging Market governmental entities, as well as by banks, companies and other
entities which are located in Developed Market or Emerging Market countries,
whether or not denominated in the currency of the Developed Market or Emerging
Market country, and (2) debt securities of other issuers, denominated in, or
linked to, the currency of a Developed Market or Emerging Market country,
including securities issued by supranational issuers, such as The World Bank,
and derivative debt securities that replicate, or substitute for, the currency
of a Developed Market or Emerging Market country. More specifically, Global Debt
Securities include, but are not limited to the following types of securities.
Local Currency Sovereign, Quasi-Sovereign and Bank Bonds. The Fund is
permitted to invest in securities issued or guaranteed by Developed Market or
Emerging Market governmental entities, including sovereign and quasi-sovereign
entities, whether or not denominated in the currency of the Developed Market or
Emerging Market country. The available maturities for these types of securities
vary from country to country.
Commercial Banks. The Fund may also invest in securities issued by banks
located in Developed Market or Emerging Market countries, whether or not
denominated in the currency of the Developed Market or Emerging Market country.
Yankee Bonds. The Fund is also permitted to invest in Yankee bonds in order
to gain exposure to certain global debt markets without exposing the Fund to
local currency risk. Yankee bonds are U.S. dollar-denominated debt securities
issued by obligors located in the Asian Countries and other Emerging Markets.
The bonds may be issued in the United States and may be registered under U.S.
securities law. Yankee bonds may be purchased from brokers operating in the
United States, or may be purchased outside the United States through offices
located outside the United States of brokers doing business in the United
States. Yankee bonds are subject to credit risk relating primarily to the issuer
of the bond and liquidity risk relating to the issuer's ability to maintain a
sufficiently liquid market for the specific issue. The bonds are also affected
by movements in U.S. interest rates.
Brady Bonds. The Fund may invest in emerging market governmental debt
obligations, which are commonly referred to as "Brady Bonds." Brady Bonds are
debt securities, generally denominated in U.S. dollars, issued under the
framework of the "Brady Plan," an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
The Brady Plan contemplates, among other things, the debtor nation's
adoption of certain economic reforms and the exchange of commercial bank debt
for newly issued bonds. Brady Bonds may also be issued in respect of new money
being advanced by existing lenders in connection with the debt restructuring. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as the World Bank or IMF. The
World Bank or IMF supports the restructuring by providing funds pursuant to loan
agreements or other arrangements that enable the debtor nation to collateralize
the new Brady Bonds or to replenish reserves used to reduce
38
outstanding bank debt. Under these loan agreements with the World Bank or IMF,
debtor nations have been required to agree to implement certain domestic
monetary and fiscal reforms. The Brady Plan sets forth only general guiding
principles for economic reform and debt reduction, emphasizing that solutions
must be negotiated on a case-by-case basis between debtor nations and their
creditors.
Agreements implemented under the Brady Plan are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, each country offers different financial
packages. Options have included the exchange of outstanding commercial bank debt
for bonds issued at 100% of face value of such debt, bonds issued at a discount
of face value of such debt, and bonds bearing an interest rate that increases
over time and the advancement of the new money for bonds. The principal of
certain Brady Bonds has been collateralized by U.S. Treasury zero coupon bonds
with a maturity equal to the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, World Bank and the debtor nation's reserves.
Interest payments may also be collateralized in part in various ways.
Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (but primarily the U.S. dollar) and are actively traded in
the over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Brady Bonds issued to date are generally
collateralized by U.S. Treasury zero-coupon bonds to ensure principal, and
generally have maturities of between 15 and 30 years from the date of issuance.
The following emerging market countries have issued Brady Bonds: Argentina,
Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, the Ivory Coast,
Jordan, Mexico, Nigeria, Panama, Peru, the Philippines, Poland, Uruguay,
Venezuela and Vietnam. In addition, other countries may announce plans to issue
Brady Bonds. The Fund may invest in Brady Bonds of emerging market countries
that have been issued to date, as well as those which my be issued in the
future.
Brady Bonds are often viewed as having three or four valuation components:
(i) the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payment;
and (iv) any uncollateralized interest and 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 can be viewed as
speculative.
Eurobonds. A Eurobond is a bond denominated in U.S. dollars or another
currency and sold to investors outside the country whose currency is used.
Eurobonds may be issued by government or corporate issuers, and are typically
underwritten by banks and brokerage firms from many countries. Eurobonds are
generally exempt from applicable laws and regulations of the country in which
they are sold. Although these bonds may be bought and sold in U.S. dollars, they
generally carry the same risks as investing in foreign securities.
Supranational Debt Obligations. The Fund may invest in debt issued by
supranational entities. Supranational entities are entities constituted by the
national governments of several countries to promote economic development, such
as the World Bank, the IMF, the European Investment Bank and the Asian
Development Bank. Obligations of these entities are supported by appropriated
but unpaid commitments of their member countries, and there can be no assurances
that these commitments will be undertaken or met in the future.
Companies. The Fund is permitted to invest in publicly-traded notes and
debentures or bills of exchange issued or guaranteed as to the payment of
principal and interest by companies domiciled in a Developed Market or Emerging
Market.
39
Derivative Securities
With respect to investments denominated in Commonwealth Currencies, the
Fund may only use derivatives to manage interest rate risk, especially when the
sale of physical securities may have an adverse impact on distributions, for
example, where it would result in the realization of sizeable capital gains or
losses, or the sale of high coupon securities. The types of derivatives which
may be used with respect to this portion of the Fund's portfolio include,
without limitation, exchange-traded fixed income futures and options. The Fund
may use only exchange-traded (as opposed to over-the-counter) interest rate
derivatives in the Australian, Canadian and United Kingdom component of the
Fund.
The Fund will not use currency derivatives to hedge risk associated with
the Fund's investments in securities denominated in the Commonwealth Currencies
because to do so would alter the fundamental charter of the Fund, namely that
investors assume exposure primarily to the Commonwealth Currencies as part of
their investment in the Fund. However, where the outlook for a particular
Commonwealth Currency is considered by the Investment Manager or Investment
Adviser to be better than an alternate currency in which the Fund may invest,
the Fund may use derivatives to hedge that currency into a Commonwealth Currency
or into the U.S. dollar.
With respect to the portion of the portfolio not denominated in a
Commonwealth Currency, the Fund will invest in derivatives for two main
purposes: (1) to modify interest rate risk and adjust currency risk within the
portfolio, and (2) to enable the Fund to replicate or substitute for a
particular security in order to gain access to a particular global market or
security, where either the physical security is too expensive, or there is an
insufficient supply of the particular security. The types of derivatives which
may be used with respect to this portion of the Fund's portfolio include, but
are not limited to, futures, options, forwards, forwards that can only be
settled in U.S. dollars, swaps, and securities with structured cash flows,
whether traded on an exchange or over-the-counter, that have as their underlying
security reference to a fixed income security or currency. In general,
derivatives will not be utilized to leverage the Fund.
When investing in Developed or Emerging Markets, the Fund will take on
exposure to the currencies of the countries in which it holds securities. The
Fund will seek to manage currency risk when the perceived outlook for a
particular currency is for depreciation against other currencies. The most
effective way of doing this is through the use of currency forwards (and
occasionally options), which provide an efficient means of implementing currency
strategies.
Investment in securities denominated in Developed Market or Emerging Market
currencies necessarily means taking on interest rate risk. This risk,
particularly in respect of the Developed Markets, can often best be managed
through the use of interest rate derivatives in those respective countries.
Also, investment in Yankee bonds involves exposure to both fluctuations in U.S.
interest rates and the credit standing of a particular issuer. There may be
times when the Fund wishes to reduce the U.S. interest rate exposure embedded in
Yankee bonds. This can be done by selling U.S. Treasury Bond futures.
Investment in global fixed income securities may at certain times be more
efficiently achieved using derivative securities to replicate physical
securities. These types of derivatives carry identical market price risks to the
equivalent physical securities but provide a number of transactional benefits.
For example, by using derivatives, the Fund may be able to implement investment
decisions at lower costs, increase the after-tax yield, obtain prices that are
not available in the underlying cash market, or settle in U.S. dollars. In less
developed markets, liquidity and credit quality can be enhanced and transaction
costs reduced by using derivatives rather than the underlying securities. This
is due to the fact that the investor assumes the lower counterparty risk of the
issuer of the derivatives (for example, an international bank rated A- or
better), rather than that of a (local currency) domestic issuer. In certain
circumstances, due to
40
lack of available direct investment opportunity or government regulations, the
only means of gaining exposure to particular countries is through derivatives.
The derivatives used for adjusting currency exposures or replicating
underlying securities are usually over-the-counter ("OTC") securities. OTC
securities carry credit risk associated with the counterparty institution. See
"Risk Factors and Special Considerations - Use of Derivatives." To manage this
risk, the Fund will only use counterparty institutions rated A- or better by
recognized international ratings agencies. Only up to 5% of total assets may be
put at risk in derivatives transactions with any single counterparty (aggregate
interest rate and currency derivatives exposure). A maximum of 10% of total
assets may be at risk in currency-linked notes and a maximum of 2.5% of total
assets may be at risk to any single counterparty in currency forwards. All
currency forwards must be settled only in U.S. dollars. All futures and forwards
are to be measured on a notional exposure basis and, therefore, they will be
cash-backed.
With respect to exchange-traded derivatives, the Fund will only engage in
transactions in such derivatives on regulated derivative exchanges. A maximum of
40% of total assets may be at risk in exchange-traded derivatives. For
Australian, Canadian and United Kingdom derivatives, the maximum gross exposure
(long positions plus short positions) will be 20% of total assets. A maximum of
35% of total assets may be at risk in derivatives traded on the Chicago Board of
Trade. A maximum of 7% of total assets may be at risk in derivatives traded on
any one other futures exchange.
The types of derivatives used by the Fund and the techniques employed may
change over time as new derivatives and strategies are developed or regulatory
changes occur. The Fund will not use derivatives where it would contravene the
guidelines set by the rating agencies for the Preferred Stock.
In general, derivatives will not be utilized to leverage the Fund, although
they may be used to hedge the interest rate risk associated with the Fund's
outstanding leverage. The Fund may use interest rate swaps to hedge the Fund's
liability with respect to the Preferred Stock. At present, the Fund has been
authorized by its Board of Directors to hedge up to one-third of the Fund's
liability with respect to the Preferred Stock. See "Portfolio Securities -
Derivative Securities - Swaps," "Risk Factors and Special Considerations - Use
of Derivatives" and "Risk Factors and Special Considerations - Preferred Stock -
Leverage Risk."
Forward Currency Contracts. The Fund may enter into forward currency
contracts. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract.
The cost to the Fund of engaging in forward currency contracts will vary
with factors such as the length of the contract period and the market conditions
then prevailing. Because forward currency contracts are usually conducted on a
principal basis, no fees or commissions are involved, although the price charged
in the transaction includes a dealer's markup. The use of forward currency
contracts in this manner is intended to fix a rate of exchange that can be
achieved at a certain time in the future.
Foreign Currency Options. The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes to achieve objectives
similar to those achieved utilizing foreign currency futures or forward
contracts. The potential benefit to the Fund derived from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
expected direction, the Fund could sustain losses on transactions in foreign
currency options. Where currency exchange rates move in the expected direction,
but not to the extent anticipated, the Fund could still sustain losses on
transactions in foreign currency options.
41
Futures Contracts. The Fund may enter into futures contracts in U.S.
domestic markets or on exchanges located outside the United States for both
hedging and non-hedging purposes. Foreign markets may offer advantages such as
trading opportunities or arbitrage possibilities not available in the United
States. Foreign markets, however, may have greater risk potential than domestic
markets. For example, some foreign exchanges are principal markets so that no
common clearing facility exists and an investor may look only to the broker for
performance of the contract. In addition, any profits the Fund might realize in
trading could be eliminated by adverse changes in the exchange rate, or the Fund
could incur losses as a result of those changes. Transactions on foreign
exchanges may include both commodities which are traded on U.S. exchanges and
those which are not. Unlike trading on U.S. commodity exchanges, trading on
foreign commodity exchanges is not regulated by the Commodity Futures Trading
Commission ("CFTC").
Engaging in these transactions involves risk of loss to the Fund which
could adversely affect the value of the Fund's net assets. No assurance can be
given that a liquid market will exist for any particular futures contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Fund to substantial losses.
Successful use of futures by the Fund also is subject to the Investment
Manager's and Investment Adviser's ability to predict correctly movements in the
direction of the relevant market, and, to the extent the transaction is entered
into for hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the futures contract. The
Fund may not use more than 5% of its assets for initial margin for speculative
commodity futures or options positions.
The Fund also may purchase and write options to buy or sell those futures
contracts in which it may invest. Such investment strategies will be used for
hedging purposes and for non-hedging purposes, subject to applicable law. An
option on a futures contract provides the holder with the right to enter into a
"long" position in the underlying futures contract, in the case of a call
option, or a "short" position in the underlying futures contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting an offsetting purchase or
sale transaction, subject to the continued availability of a
42
liquid secondary market, which is the purchase or sale of an option of the same
type (i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid and
received represents the Fund's profit or loss on the transaction.
Options on futures contracts that are written or purchased by the Fund on
U.S. exchanges are traded on the same contract market as the underlying futures
contract, and, like futures contracts, are subject to regulation by the CFTC and
the performance guarantee of the exchange clearinghouse. The Fund may not use
more than 5% of its assets for initial margin for speculative commodity futures
or options positions.
Swaps. The Fund may enter into interest rate swaps, currency swaps and
other types of available swap agreements, including swaps on securities,
financial commodities and indices, and related types of derivatives, such as
caps, collars and floors. A swap is an agreement between two parties pursuant to
which each party agrees to make one or more payments to the other on regularly
scheduled dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other types
of financial instruments or assets or the levels of specified indices. Under a
typical swap, one party may agree to pay a fixed rate or a floating rate
determined by reference to a specified instrument, rate or index, multiplied in
each case by a specified amount (the "notional amount"), while the other party
agrees to pay an amount equal to a different floating rate multiplied by the
same notational amount. On each payment date, the obligations of parties are
netted, with only the net amount paid by one party to the other. All swap
agreements entered into by the Fund with the same counterparty are generally
governed by a single master agreement, which provides for the netting of all
amounts owed by the parties under the agreement upon the occurrence of an event
of default, thereby reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging purposes
and, therefore, may increase or decrease the Fund's exposure to the underlying
instrument, rate, asset or index. Swap agreements can take many different forms
and are known by a variety of names. The Fund is not limited to any particular
form or variety of swap agreement if the Adviser determines it is consistent
with the Fund's investment objective and policies.
Private Placements
Certain debt securities purchased by the Fund may have been placed
privately. These securities, which include debt securities offered in the
Euromarkets, are somewhat less liquid than securities which are widely traded by
the public and there may be contractual restrictions on their resale to the
public.
43
Therefore, although these securities may be resold in privately negotiated
transactions, the prices realized from such sales may be less than what might
have been realized on a more active public trading market.
Other Investment Companies
Subject to the limitations set forth in Section 12(d) of the 1940 Act, the
Fund may invest in securities issued by other registered U.S. investment
companies that invest primarily in fixed-income securities. The Fund will not
invest in affiliated investment companies. As a shareholder of another
investment company, the Fund will bear its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the expenses, including advisory fees, that the Fund bears in
connection with its own operations.
Repurchase and Securities Lending Agreements
The Fund is permitted to invest in repurchase agreements with banks and
broker-dealers. A repurchase agreement is a contract under which the Fund
acquires a security for a relatively short period (usually no more than one
week) subject to the obligations of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). The Investment Manager monitors the value of such securities
daily to determine that the value equals or exceeds the repurchase price. Under
the 1940 Act, repurchase agreements are considered to be loans made by the Fund
which are collateralized by the securities subject to repurchase. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities. The Fund will enter into repurchase
agreements only with parties who meet creditworthiness standards approved by the
Fund's Board of Directors, i.e., banks or broker-dealers which have been
determined by the Investment Manager to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame contemplated by the
repurchase transaction.
The Fund may also lend to banks and broker-dealers portfolio securities
with an aggregate market value of up to one-third of its total assets when it
deems advisable. Any such loans must be secured by collateral (consisting of any
combination of cash, U.S. Government securities, irrevocable letters of credit
or other high-quality debt securities) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The Fund may terminate the loans at any time and obtain the return of the
securities. The Fund will continue to receive any interest or dividends paid on
the loaned securities and will continue to have voting rights with respect to
the securities. In connection with the lending of its portfolio securities, the
Fund is exposed to the risk of delay in recovery of the securities loaned or
possible loss of right in the collateral should the borrower become insolvent.
The Fund will enter into repurchase agreements and securities lending
agreements only with parties such as banks and broker-dealers who meet
creditworthiness standards approved by the Fund's Board of Directors. Issuers of
irrevocable letters of credit used as collateral for securities lending
agreements must meet the same or similar standards.
Firm Commitment Agreements and When-Issued Securities
The Fund may purchase debt securities on a firm commitment or when-issued
basis. New issues of certain debt securities are often offered on a when-issued
basis; that is, the payment obligation and the interest rate are fixed at the
time the buyer enters into the commitment, but delivery and payment for the
securities normally take place after the date of the commitment to purchase.
Firm commitment agreements call for the purchase of securities at an agreed-upon
price on a specified future date. The
44
transactions are entered into in order to secure what is considered to be an
advantageous price and yield to the Fund and not for purposes of leveraging the
Fund's assets. The Fund will not earn any income on these securities prior to
delivery. The value of when-issued securities and firm commitment agreements may
vary prior to and after delivery depending on market conditions and changes in
interest rate levels. There is a risk that a party with whom the Fund has
entered into such transactions will not perform its commitment, which could
result in a gain or loss to the Fund. The Fund will maintain in a segregated
account with its custodian cash or high-quality debt securities equal (on a
daily marked-to-market basis) to the amount of its commitment to purchase the
securities on a when-issued or firm commitment basis.
U.S. Securities
Government. The Fund is permitted to invest in U.S. government securities,
including obligations issued or guaranteed by U.S. government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury (such as direct pass-through certificates of the Government
National Mortgage Association), some of which are supported by the right of the
issuer to borrow from the U.S. government (such as obligations of Federal Home
Loan Banks), and some of which are backed only by the credit of the issuer
itself. Government obligations do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. government obligations are generally
lower than the yields available from corporate interest bearing securities. Like
other interest bearing securities, however, the value of Government obligations
changes as interest rates fluctuate.
Corporations and Banks. The Fund is permitted to invest for defensive and
other temporary purposes in U.S. corporate debt instruments rated at the time of
investment Aa or better by Moody's or AA or better by S&P, finance company and
corporate commercial paper, and other short-term obligations, in each case rated
at the time of investment Prime-2 or better by Moody's or A-2 or better by S&P.
The Fund is also permitted to invest in obligations of U.S. Federal or state
chartered banks and bank holding companies rated at the time of investment Aa or
better by Moody's or AA or better by S&P (including certificates of deposit,
bankers' acceptances and other short-term debt obligations).
Portfolio Turnover
It is the Fund's policy to sell any security whenever, in the judgment of
the Investment Manager, it is advisable to do so, irrespective of the length of
time that such security has been held. The Investment Manager anticipates that
the Fund's annual rate of portfolio turnover will not exceed 100%. A 100% annual
turnover rate would occur if all the fixed income securities in the Fund's
portfolio were replaced once within a period of one year. The turnover rate has
a direct effect on the transaction costs to be borne by the Fund. Volatility in
the securities markets in which the Fund invests could cause the Fund's
portfolio turnover rate to be higher than anticipated. It is possible that the
Fund's redeployment of some its assets currently invested in the Commonwealth
Countries to fund additional investments in Global Debt Securities may increase
the Fund's portfolio turnover rate in the near term.
Borrowings
The Fund may borrow for temporary or emergency purposes as long as the
relevant asset coverage requirements are met. The 1940 Act requires the Fund to
maintain "asset coverage" of not less than 300% of its "senior securities
representing indebtedness," as those terms are defined and used in the 1940 Act.
45
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund, which
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (as that term is defined in the 1940 Act).
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentage
resulting from changing values will not be considered a violation.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as may
be necessary or routine for the clearance or settlement of transactions and
except that the Fund may engage in transactions in options on foreign currencies
and forward contracts and post margin in connection therewith consistent with
its investment policies.
2. Make short sales of securities or maintain a short position (other
than with respect to the use of derivatives).
3. Issue senior securities except (i) insofar as the Fund may be deemed
to have issued a senior security in connection with any repurchase or securities
lending agreement or any borrowing permitted by these investment restrictions,
and (ii) that the Fund may issue one or more series of a class of preferred
shares pursuant to its Articles.
4. Borrow money, or pledge, hypothecate, mortgage or otherwise encumber
its assets, except that the Fund may borrow for temporary or emergency purposes,
if after such borrowing there is asset coverage of at least 300% as defined in
the 1940 Act. For the purposes of this restriction, collateral arrangements with
respect to transactions in options on foreign currencies and forward contracts
are not deemed a pledge of assets or the issuance of a senior security.
5. Purchase any security (except as provided below) if as a result more
than 25% of the total value of its assets would then be invested in securities
of issuers in a particular industry, except that the Fund will, under normal
circumstances, invest more than 25% of its assets in securities issued or
guaranteed by the governments, territories, provinces or states of Australia,
Canada, New Zealand and the United Kingdom (and their instrumentalities and
agencies, including government-owned entities) or repurchase agreements with
respect thereto. This restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies and instrumentalities (or
repurchase agreements with respect thereto).
6. Make loans except through the purchase of debt obligations and the
entering into of repurchase and securities lending agreements in accordance with
the Fund's investment objectives and policies.
7. Act as an underwriter of other issuer's securities (except to the
extent the Fund may be deemed to be an underwriter in connection with the sale
of securities in the Fund's investment portfolio).
8. (i) Purchase or sell real estate, except that it may purchase and
sell mortgage-backed securities, debt securities issued by real estate
investment trusts, and debt securities of companies which deal in real estate or
interests therein, (ii) purchase or sell commodities (other than transactions in
foreign currencies and forward currency contracts or derivatives in accordance
with the Fund's investment objectives and policies) or (iii) invest in interests
in oil, gas, or other mineral exploration or
46
development programs, except that it may purchase and sell debt securities of
companies that deal in oil, gas or other mineral exploration or development
programs.
RISK FACTORS AND SPECIAL CONSIDERATIONS
This Prospectus contains certain 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.
Investing in the Shares involves certain risks and considerations not typically
associated with investing in the United States. The following discusses risks
and special considerations with respect to the Offer and with respect to an
investment in the Fund. In managing the Fund, the Investment Manager and
Investment Adviser will manage all risks in accordance with their stated
investment guidelines.
Dilution - Net Asset Value and Non-Participation in the Offer
Assuming that Rights are exercised, Record Date Stockholders 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 state precisely the
amount of any such dilution in share ownership because the Fund does not know at
this time what proportion of the Shares will be purchased as a result of the
Offer.
As of the date of this Prospectus, the Subscription Price per share for the
Offer is less than the Fund's NAV per share. Assuming that all Rights are
exercised and there is no change in the NAV per share, Stockholders would
experience an immediate dilution of the aggregate NAV of their shares of Common
Stock as a result of the Offer. The amount of any decrease in NAV is not
predictable because it is not known at this time what the NAV per share will be
at the Expiration Date or what proportion of the Shares will be purchased as a
result of the Offer. Such dilution could be substantial.
For example, assuming that all Rights are exercised at the Subscription
Price of $____ and the NAV per share at the Expiration Date was $____, the
Fund's NAV per share (after payment of the Dealer Managers and soliciting fees
and estimated offering expenses) would be reduced by approximately $____ per
share (or ____%).
The fact that the Rights are transferable may reduce the effects of any
dilution as a result of the Offer. You can transfer or sell your Rights. The
cash received from the sale of Rights is partial compensation for any possible
dilution. There can be no assurances, however, that a market for the Rights will
develop or the Rights will have any value in that market.
Current Distribution Rate
From its inception, the Fund has paid regular monthly distributions. These
distributions have been paid from net investment income and supplemented by
realized capital gains and return of paid-in capital. The amount of monthly
distributions has been adjusted (principally downward) from time to time to
reflect the current interest rate environment. For the current fiscal year, the
distributions to date have exceeded the sum of net investment income and
realized capital gains. To the extent total distributions for the year exceed
the Fund's net investment income, the difference will be deemed for income tax
purposes to have been distributed from realized capital gains or will be treated
as return of capital, as applicable. Although the Fund anticipates that
investment of the proceeds in higher yielding Global Debt Securities will enable
the Fund to increase the Fund's net investment income above the current level,
Stockholders are cautioned that there can be no guarantee of future performance.
47
The Fund's investment in Global Debt Securities involves risks and
uncertainties so that actual results may differ materially from those
anticipated as a result of various factors. If the anticipated results are not
achieved, the Fund may not be able to maintain the current level of monthly
distributions. The Fund undertakes no obligation to update or revise the
disclosure in this Prospectus with regard to the effect of increased investment
in global markets on the Fund's distribution rate, to reflect current events or
circumstances after the date of this Prospectus or to reflect the occurrence of
unanticipated events.
The Board of Directors reviews the level of distributions on a
continuing basis at its quarterly Board meetings. 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 will not be entitled to the
distribution to be declared to Stockholders of record on [month day, year] which
is payable in [month year]. Whether a Stockholder is entitled to the
distribution to be declared to Stockholders of record on [month day, year] which
is payable in [month year] will depend on the date Shares are actually issued to
the Stockholder.
Interest Rate Fluctuations
Fluctuations in interest rates in the relevant bond markets can affect
the Fund's NAV and distribution rate. The Fund's NAV is adversely affected
during periods of rising interest rates in those bond markets and is favorably
affected during periods when interest rates fall. Moreover, the Fund may
recognize capital losses, impacting its ability to supplement distributable
income, when bonds in the Fund's portfolio are sold or mature at a price which
is less than the Fund's cost.
In addition to fluctuation in interest rates, any overall downward
trend in interest rates can be expected to ultimately reduce available yields to
Fund Stockholders, which could in turn result in a reduction in the amount of
the Fund's monthly distributions. While interest rates in the Commonwealth
Countries were higher than interest rates in the U.S. at the inception of the
Fund in 1992, yields on debt securities denominated in the Commonwealth
Currencies have generally declined in recent years and are currently more
comparable to yields available in the U.S. Although relatively high levels of
interest rates are currently available in global debt markets, including the
Asian Countries, there can be no assurance that these rates will continue to be
obtainable.
Changes in the level of interest rates in the relevant markets in which
the Fund invests will affect the market price of its portfolio securities and
the net asset value of the Fund at any given time. These changes are usually
more substantial in Emerging Market countries where large interest rate changes
are not uncommon. The level of interest rate risk will vary from country to
country depending on political and economic factors and monetary policy. See,
e.g., "Appendix A - Economic Information - Asian Economic Data."
Currency Exchange Rate Fluctuations
It is expected that normally at least 65% of the Fund's total assets
will be invested in debt securities denominated in the Commonwealth Currencies.
The Fund may also invest up to 35% of its assets in Global Debt Securities,
including, but not limited to, debt securities which are denominated in, or
linked to, the currency of countries other than the Commonwealth Countries or
the United States (see "Portfolio Securities - Global Debt Securities").
Currency exchange rates can fluctuate significantly over short periods and can
be subject to unpredictable changes based on a variety of factors including
political developments and currency controls by foreign governments. A change in
the value of the currency in which a portfolio security is denominated against
the U.S. dollar will generally result in a change in the U.S. dollar value of
the Fund's assets. If the exchange rate for a foreign currency declines compared
to the U.S. dollar, the Fund's NAV would decline. In addition, although most of
the Fund's income will be
48
received or realized primarily in foreign currencies, the Fund will be required
to compute and distribute its income in U.S. dollars. Therefore, for example, if
the exchange rate for a foreign currency declines after the Fund's income has
been accrued and translated into U.S. dollars, but before the income has been
received or converted into U.S. dollars, the Fund could be required to liquidate
portfolio securities to make distributions. Similarly, if the exchange rate
declines between the time the Fund incurs expenses in U.S. dollars and the time
the expenses are paid, the amount of foreign currency required to be converted
into U.S. dollars in order to pay the expenses in U.S. dollars will be greater
than the foreign currency equivalent of the expenses at the time they were
incurred.
Currency exchange rate fluctuations can decrease or eliminate income
available for distribution or conversely increase income available for
distribution. For example, in some situations, if certain currency exchange
losses exceed net investment income for a taxable year, the Fund would not be
able to make ordinary income distributions and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to stockholders for U.S. Federal income
tax purposes thus reducing Stockholders' cost basis in their Fund shares, or as
capital gain, rather than as an ordinary income dividend.
The Fund will not seek to hedge against adverse currency fluctuations
in the Commonwealth Currencies. With respect to currencies other than the
Commonwealth Currencies, the Investment Manager and Investment Adviser expect to
hedge foreign currency risks in accordance with their views by engaging in
foreign currency exchange transactions. These may include buying and selling
foreign currency options, foreign currency futures, options on foreign currency
futures and swap arrangements. Many of these activities constitute "derivatives"
transactions. See "Use of Derivatives" below. There can be no assurance that the
Fund will employ a currency hedge at any given time, nor can there be any
assurance that the Fund will be able to do this hedging successfully. Moreover,
currency fluctuations against the U.S. dollar in many foreign countries in which
the Fund invests have historically been profound and negative. Although exchange
rates against the U.S. dollar have been favorable in recent months, there can be
no assurance that favorable exchange rates will continue. Nor can there be any
assurance that currency fluctuations against the U.S. dollar will not return to
being profound and negative.
The Commonwealth Currencies are fully exchangeable into U.S. dollars
without legal restriction. However, investments made in the local currencies of
an Emerging Market country may not be freely convertible into other currencies.
Exchange rate fluctuations and local currency devaluation could have a material
effect on the value of these securities. See "Appendix A - Economic
Information."
Risks Involved in Global Investment
In March 1999, holders of the Fund's Common Stock and Preferred Stock
approved a series of proposals allowing the Fund, among other things, to (1)
invest up to 35% of its total assets in Global Debt Securities; (2) reduce the
average quality of its portfolio to A or better; (3) invest up to 15% of its
total assets in debt securities rated, or judged by the Investment Manager to
be, below investment grade at the time of investment; (4) use derivatives to
manage currency and interest rate risk, as well as replicate or substitute for
Physical Securities; and (5) invest in the securities of other investment
companies that themselves invest primarily in fixed-income securities.
Investment in global debt markets will expose the Fund to greater foreign
exchange risk, interest rate risk, credit risk, political and economic risk
("event risk") and liquidity risk than would be the case if the Fund invested
only in securities denominated in the Commonwealth Currencies.
Credit Risk. The proposals approved by the holders of the Fund's Common
Stock and Preferred Stock in March 1999 permit the Fund to invest up to 15% of
its total assets in debt securities which, at the time of investment, are rated
below investment grade (i.e., securities that have been rated below BBB- by
49
S&P or Baa3 by Moody's) or, if unrated, are in the opinion of the Investment
Manager, of equivalent quality. Among other things, investment in securities
which are rated below investment grade requires skilled credit analysis and
reduces the overall credit quality of the Fund's portfolio.
Investments in securities rated below investment grade are subject to
greater market fluctuations and risk of loss of income and principal than
investments in securities with investment grade credit ratings. The former will
generally provide higher yields due to the higher premia required by investors
for taking the associated credit risk.
Investments in debt securities expose the Fund to credit risk (that is,
the risk of default on interest and/or principal payments). Credit risk is
influenced by changes in general economic and political conditions and changes
in the financial condition of the issuers. During periods of economic downturn
or rising interest rates, issuers of securities with a low credit rating may
experience financial weakness that could affect their ability to make payments
of interest and principal.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the value and liquidity of securities
with low credit ratings, especially in markets characterized by a low volume of
trading.
Unrated Securities. The Fund is permitted to invest in unrated debt
securities. Unrated securities, while not necessarily of lower quality
than rated securities, generally do not have a broad market. Before
purchasing an unrated security, the Investment Manager and Investment
Adviser intend to analyze the creditworthiness of the issuer of the
security and of any financial institution or other party responsible
for payments on the security in order to assign a rating to the
security.
Below-Investment Grade Securities. Ratings of debt securities represent
the rating agency's opinion regarding their quality and are not a
guarantee of quality. Rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of
fluctuations in market value. Because rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, the
Investment Manager and Investment Adviser will continuously monitor the
issuers of securities held to determine whether the issuers have
sufficient cash flows and profits to meet principal and interest
payments.
The achievement of the Fund's investment objective will be more
dependent on the Investment Manager or the Investment Adviser's own
credit analysis than might be the case for a fund which invests in
higher quality bonds. The Fund may retain a security the rating of
which has been changed. The market values of lower quality debt
securities tend to reflect individual developments of the issuer to a
greater extent than do higher quality securities, which react primarily
to fluctuations in the general level of interest rates.
Issuers of lower quality debt securities tend to be highly leveraged.
Those issuers may also not have available to them traditional methods
of financing. For example, during an economic downturn or a sustained
period of rising interest rates, highly leveraged issuers of lower
quality securities may experience financial stress. During these
periods, issuers may not have sufficient revenue to meet their interest
payment obligations. An issuer's ability to service debt obligations
may also be adversely affected by specific developments affecting the
issuer, such as the issuer's inability to meet specific projected
business forecasts or the unavailability of additional financing.
Similarly, certain Emerging Market governments that issue lower quality
debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as The World
Bank, and may not be able or willing to make principal and/or
50
interest repayments as they come due. The risk of loss due to default
by the issuer is significantly greater for the holders of lower quality
securities because these securities are generally unsecured and are
often subordinated to higher ranking creditors of the issuer.
The Fund may also incur additional expense to the extent that it is
required to seek recovery on a default in the payment of principal or
interest on its portfolio holdings, and the Fund 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 for defaults generally must be
pursued in the courts of the defaulting government, and legal recourse
may be diminished. Political conditions, in terms of a government's
willingness to meet the terms of its debt obligations, are also of
considerable significance. There can be no assurance that the holders
of commercial bank debt may not contest payments to the holders of debt
securities issued by governments in the event of default by the
governments under commercial bank loan agreements.
The Investment Manager and Investment Adviser will attempt to minimize
the speculative risks associated with investments in lower quality
securities through credit analysis and by carefully monitoring such
current trends as interest rates and political developments.
Management of Credit Risk. At the upper end of the credit rating
spectrum, recognized international ratings agencies such as S&P and Moody's
provide extensive risk credit analysis for investors. However, in some Emerging
Markets, where issues are often unrated or are at the lower end of the credit
risk spectrum, the Investment Manager and Investment Adviser believe that
opportunities exist for skilled analysts to add value through extensive company
research and detailed credit assessment.
The Investment Manager and Investment Adviser also consider external
credit assessments available from rating agencies such as S&P and Moody's, as
well as any reports on the issuer which may be available from brokers or other
sources. A chart showing the current S&P and Moody's credit ratings on long-term
foreign sovereign debt for the Asian Countries in which the Fund currently
invests is included in Appendix A.
Low-credit debt can sometimes become equity. Due to the conversion of
convertible notes and warrants, the Fund may from time to time become an (often)
involuntary holder of equities until such stock can be sold as and when an
optimal price can be achieved, given market conditions. It may be in the
interests of stockholders for the Fund to hold such stock for short term
periods.
Similarly, distressed companies can sometimes restructure via
debt-for-equity swaps in order to stay solvent and viable. In this case, the
investor becomes an involuntary equity holder and, once again, it may be in the
best interests of stockholders that the Fund hold such securities for short
periods of time, especially in extreme market conditions, until optimal prices
can be obtained.
Political and Economic Risk. The Fund's investments could in the future
be adversely affected by any increase in taxes or by political, economic or
diplomatic developments in the countries in which the Fund invests. Moreover,
accounting, auditing and financial reporting standards and other regulatory
practices and requirements vary from those applicable to entities subject to
regulation in the United States.
Global Debt Securities may involve different, and sometimes greater,
risks than securities of issuers in the U.S. and the Commonwealth Countries.
Many global economies are considered to be more politically volatile than the
traditional Western style democracies. Investments in securities of issuers in
countries other than the U.S. and the Commonwealth Countries may involve greater
political risk,
51
including in some countries, the possibility of expropriation, confiscatory
taxation or nationalization of assets, and the establishment of foreign exchange
controls. Central authorities also tend to exercise a high degree of control
over the economies and in many cases have ownership over core productive assets.
Due to their strong reliance on international trade, most global
economies tend to be sensitive both to economic changes in their own region and
to changes affecting their major trading partners. These include changes in
growth, inflation, foreign exchange rates, current account positions, government
policies, taxation and tariffs. See, e.g., "Appendix A - Economic Information -
Asian Economic Data."
Liquidity Risk. While the Fund ordinarily invests only in debt
securities for which there is an active secondary market, the Fund may invest in
Global Debt Securities for which there is no established secondary market. The
securities markets that exist in Emerging Market countries are substantially
smaller, less developed, less liquid and more volatile than the securities
markets of the United States and other more developed countries.
In some global markets, including some Emerging Market countries, there
is no established secondary market for securities. Therefore, liquidity in these
countries is generally low and transaction costs high. Reduced liquidity often
creates higher volatility, as well as difficulties in obtaining accurate market
quotations for financial reporting purposes and for calculating net asset
values, and sometimes also an inability to buy and sell securities. Market
quotations on many Global Debt Securities may only by available from a limited
number of dealers and may not necessarily represent firm bids from those dealers
or prices for actual sales.
In addition, the markets for below investment grade securities may be
substantially smaller, less developed, less liquid and more volatile than the
markets for prime rated securities, which may make obtaining accurate market
quotations for financial reporting purposes and for calculating net asset values
more difficult. Market quotations on many sub-investment grade securities may
only be available from a limited number of dealers and may not necessarily
represent firm bids from those dealers or prices for actual sales.
Tax Risk. Income earned on investments in foreign countries may be
subject to applicable withholding taxes and other taxes imposed by the
governments of these countries. There can be no assurance that foreign tax laws
will not be changed in a manner which adversely affects foreign investors.
Legal and Accounting Risk. The legal systems in many Emerging Market
countries are less developed than those in more developed countries, with the
administration of laws and regulations often subject to considerable discretion.
While the development of the legal systems is a positive step, there is a risk
that foreign investors will be adversely affected by new laws or changes to
existing laws.
Accounting and auditing standards applied in certain Emerging Market
countries frequently do not conform with the accepted international standards
used in the Commonwealth Countries and the U.S. In some cases, accounting
policies, for example the use of the constant purchasing power method, can cause
some distortion. Also, substantially less financial information is generally
publicly available about issuers in Emerging Market countries and, where
available, may not be independently verifiable.
Use of Derivatives
Consistent with its investment objective, the Fund may invest in a
broad array of financial instruments and securities in which the value of the
instrument or security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate or a foreign
currency ("derivatives"). Derivatives are most often used to manage investment
risk, to increase or
52
decrease exposure to an asset class or benchmark (as a hedge or to enhance
return), or to create an investment position directly (often because it is more
efficient or less costly than direct investment). There is no guarantee that
these results can be achieved through the use of derivatives and any success in
their use depends on a variety of factors including the ability of the
Investment Manager and Investment Adviser to predict correctly the direction of
interest rates, securities prices, currency exchange rates and other factors.
The primary risk of derivatives is the same as the risk of the underlying
asset, namely that the value of the underlying asset may increase or decrease.
Adverse movements in the value of the underlying asset can expose the Fund to
losses. In addition, risks in the use of derivatives include:
. an imperfect correlation between the price of derivatives and the
movement of the securities prices, interest rates or currency exchange
rates being hedged or replicated;
. the possible absence of a liquid secondary market for any particular
derivative at any time;
. the potential loss if the counterparty to the transaction does not
perform as promised;
. the possible need to defer closing out certain positions to avoid
adverse tax consequences, as well as the possibility that derivative
transactions may result in acceleration of gain, deferral of losses or
a change in the character of gain realized;
. the risk that the financial intermediary "manufacturing" the
over-the-counter derivative, being the most active market maker and
offering the best price for repurchase, will not continue to create a
credible market in the derivative;
. because certain derivatives are "manufactured" by financial
institutions, the risk that the Fund may develop a substantial
exposure to financial institution counterparties; and
. the risk that a full and complete appreciation of the complexity of
derivatives and how future value is affected by various factors
including changing interest rates, exchange rates and credit quality
is not attained.
The Fund may use interest rate swaps to hedge the Fund's liability with
respect to the Preferred Stock. At present, the Fund has been authorized by its
Board of Directors to hedge up to one-third of the Fund's liability with respect
to the Preferred Stock. This allows the Fund to lock in the relatively low
current U.S. dollar interest rates with respect to up to one-third of the Fund's
outstanding Preferred Stock. A significant type of risk associated with interest
rate swaps is the risk that the counterparty may default or file for bankruptcy,
in which case the Fund would bear the risk of loss of the amount expected to be
received under the swap agreement. See "Portfolio Securities - Derivative
Securities - Swaps." There can be no assurance that the Fund will have an
interest rate swap in place at any given time, nor can there be any assurance
that, if an interest rate swap is in place, it will be successful in hedging the
Fund's interest rate risk with respect to the Preferred Stock.
Call or Buy-Back Features
Debt securities occasionally have call or buy-back features that would
permit an issuer to call or repurchase the security from the holder. The
Investment Manager and Investment Adviser anticipate that these securities could
be sold only to a limited number of dealers or institutional investors as there
may
53
not be an established retail secondary market for many of these securities, or
where there is a market, the securities may not be easily tradable.
Preferred Stock - Leverage Risk
The Fund has issued US$30 million of Preferred Stock, which is tantamount
to borrowing this sum of money. The Preferred Stock creates an opportunity for
the holders of the Fund's Common Stock to experience greater capital
appreciation and higher yields, while at the same time increasing exposure to
capital risk. The net cost of the Preferred Stock is an expense which could
limit the Fund's net investment income in any given period.
Capital raised through leverage is subject to interest and other costs, and
these costs could exceed the income earned by the Fund on the proceeds of such
leverage. There can be no assurance that the Fund's income from the proceeds of
leverage will exceed these costs. However, the Investment Manager and Investment
Adviser seek to use leverage for the purposes of making additional investments
only if they believe, at the time of using leverage, that the total return on
the assets purchased with such funds will exceed interest payments and other
costs on the leverage. In the event of a default on one or more loans or other
interest-bearing instruments held by the Fund, the use of leverage would
exaggerate the effect on the Fund's net asset value. The holders of the Fund's
Preferred Stock and the Fund's lenders, if any, will have priority to the Fund's
assets over the holders of the Fund's Common Stock.
The Preferred Stock results in leveraging, which is usually considered
speculative and involves certain risks to the holders of Common Stock. These
risks include a higher volatility of the NAV of the Common Stock, potentially
more volatility in the market value of the Common Stock, and the relatively
greater effect on the NAV of the Common Stock caused by favorable or adverse
changes in currency exchange rates. In addition, fluctuations in the dividend
rates on the Preferred Stock will affect the return to holders of Common Stock,
with increases in the Preferred Stock dividend rates decreasing such return. So
long as the Fund is able to realize a higher net return on its investment
portfolio than the then-current dividend rate of the Preferred Stock, the effect
of leverage will be to cause holders of Common Stock to realize a higher current
rate of return than if the Fund were not leveraged. On the other hand, interest
rates on U.S. dollar-denominated and foreign currency denominated obligations
change from time to time as does their relationship to each other depending on
such factors as supply and demand forces, monetary and tax policies within each
country and investor expectations. Changes in such factors could cause the
relationship between such rates to change so that rates on U.S.
dollar-denominated obligations may substantially increase relative to the
foreign currency denominated obligations in which the Fund may be invested. The
extent that the current dividend rate on the Preferred Stock approaches the net
return on the Fund's investment portfolio, the benefit of leverage to holders of
Common Stock will be reduced, and if the current dividend rate on the Preferred
Stock were to exceed the net return on the Fund's portfolio, the Fund's
leveraged capital structure would result in a lower rate of return to holders of
Common Stock than if the Fund were not leveraged. Further, because any decline
in the NAV of the Fund's investments will be borne entirely by holders of Common
Stock, in a declining market, the Fund's leverage would result in a greater
decrease in NAV to holders of Common Stock than if the Fund were not leveraged.
This would likely be reflected in a greater decline in the market price for
shares of Common Stock. If the Fund's current investment income were not
sufficient to meet dividend requirements on Preferred Stock, it could be
necessary for the Fund to liquidate certain of its investments, thereby further
reducing the NAV attributable to the Fund's Common Stock.
In order to reduce the risk that the dividend requirements on the Preferred
Stock will exceed the net return of the Fund's investment portfolio, the Fund
may use interest rate swaps to hedge the Fund's liability with respect to the
Preferred Stock. At present, the Fund has been authorized by its Board of
Directors to hedge up to one-third of the Fund's liability with respect to the
Preferred Stock. This allows
54
the Fund to lock in the relatively low current U.S. dollar interest rates with
respect to up to one-third of the Fund's outstanding Preferred Stock. There can
be no assurance that the Fund will have an interest rate swap in place at any
given time, nor can there be any assurance that, if an interest rate swap is in
place, it will be successful in hedging the Fund's leverage risk with respect to
the Preferred Stock. See "Risk Factors and Special Considerations - Use of
Derivatives."
During certain periods of the Fund's operations, long-term debt obligations
denominated in the Commonwealth Currencies have produced higher yields than U.S.
short-term obligations. The difference between the U.S. short-term rates paid by
the Fund on the Preferred Stock and the net long-term debt rates received by the
Fund has, during such periods, provided holders of Common Stock with a higher
yield. Holders of Common Stock have generally benefited from the Fund's issuance
of the Preferred Stock which commenced in 1992. Since the fiscal quarter
beginning August 1, 1997, there have been periods during which the shrinking
yield differential between rates available in the Commonwealth Countries and
rates available in the U.S. combined with the depreciation of the Commonwealth
Currencies have resulted in the Preferred Stock having a negative impact on the
total return to holders of Common Stock. During the 12 months to July 31, 2002,
the key investment trend was an end to the unilateral strength of the U.S.
dollar. The Australian dollar, British pound and New Zealand Dollar all rose
against the U.S. dollar, gaining 7.5%, 10.4% and 13.5%, respectively. Most Asian
currencies followed a similar trend. Only the Canadian dollar weakened over the
period, falling 2.9%. Further, with U.S. interest rates at historic lows, the
differential between the cost of the Preferred Stock and the rates at which the
Fund invests remains positive. Offsetting these impacts slightly have been
capital losses as bond yields have risen in line with signs of global recovery.
The proposed increased investment of a more significant percentage of the
Fund's total assets in higher yielding Global Debt Securities is expected to
increase the Fund's net investment income above the current level by taking
increased advantage of the relatively high level of interest rates currently
available in global securities markets compared with interest rates prevailing
in the Commonwealth Countries. See "The Offer - Purpose of the Offer." The
implementation of this strategy is proposed to occur within approximately one to
four months of the completion of the Offer by a combination of investing the net
proceeds of the Offer together with the proceeds from the sale of existing
portfolio securities and proceeds received from maturing Commonwealth debt
securities held in the Fund's portfolio. Stockholders are cautioned that there
can be no guarantee of future performance and the Fund's investment in Global
Debt Securities involves risks and uncertainties, so that actual results may
differ materially from those anticipated as a result of various factors. The
Fund undertakes no obligation to update or revise the disclosure in this
Prospectus with regard to the effect of increased investment in global markets
on the Fund's leverage, current events or circumstances after the date of this
Prospectus or the occurrence of unanticipated events.
The Fund has the authority to redeem the Preferred Stock for any reason and
may redeem all or part of the Preferred Stock if it anticipates that the Fund's
leveraged capital structure will result in a lower rate of return to holders of
the Common Stock than that obtainable if the Common Stock were unleveraged for
any significant amount of time. The Fund may also need to redeem all or a
portion of the Preferred Stock to the extent required by the 1940 Act, the terms
of the Preferred Stock or by rating agencies rating the Preferred Stock. The
leveraging of the Common Stock would be eliminated during any period that
Preferred Stock is not outstanding. See "The Fund - Description of Preferred
Stock."
Because the Investment Manager's and the Investment Adviser's fees are
based on the average net assets of the Fund which include the Preferred Stock,
the Investment Manager and Investment Adviser have benefited from the Fund's
determination not to redeem the Preferred Stock.
55
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. The
amounts borrowed pursuant to any credit facility or obtained through the
issuance of Preferred Stock may constitute a substantial lien and burden by
reason of their prior claim against the income of the Fund and against the net
assets of the Fund in liquidation. The holders of the Fund's Preferred Stock
have priority to the Fund's assets over the holders of the Fund's Common Stock
to the extent of the aggregate liquidation preference.
The Fund will not be permitted to declare dividends or other distributions,
including dividends and distributions with respect to Common Stock or Preferred
Stock, or purchase or redeem Common Stock or Preferred Stock unless at the time
thereof the Fund meets certain asset coverage requirements. In addition, the
Fund will not be permitted to pay dividends on, or redeem or repurchase, Common
Stock unless all accrued dividends on the Preferred Stock, or accrued interest
on borrowings, if any, have been paid or set aside for payment.
The Fund may be subject to certain restrictions imposed by lenders to the
Fund or by guidelines of one or more rating agencies which may issue ratings for
the Fund's Preferred Stock. These restrictions impose asset coverage, fund
composition requirements or limits on investment techniques, such as the use of
financial derivative products, that are more stringent than those imposed by the
1940 Act. These covenants or guidelines could impede the Investment Manager from
fully managing the Fund's portfolio in accordance with the Fund's investment
objective and guidelines.
Net Asset Value Discount
Shares of closed-end investment companies frequently trade at a discount
from NAV. This characteristic is a risk separate and distinct from the risk that
NAV will decrease. The Fund's shares have frequently traded at prices below NAV
since the commencement of the Fund's operations. In the 12-month period ended
July 31, 2002, the Fund's shares have traded in the market at an average
discount to NAV of -7.44%. The Fund cannot predict whether its shares in the
future will trade at, below or above NAV. The risk that shares of a closed-end
fund might trade at a discount is more significant for investors who wish to
sell their shares in a relatively short period of time. For those investors,
realization of gain or loss on their investment is likely to be more dependent
upon the existence of a premium or discount than upon portfolio performance.
Foreign Custody
The Fund generally holds its foreign securities and cash in foreign banks
and securities depositories. Some foreign banks and securities depositories may
be recently organized or new to the foreign custody business. There may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund to buy, sell and
hold securities in certain foreign markets than in the United States. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than for investment companies invested only in the United
States.
Non-Diversified Status
The Fund is classified as a "non-diversified" management investment company
under the 1940 Act, which means that the Fund is not limited by the 1940 Act as
to the proportion of its assets that may be invested in the securities of a
single issuer. As a non-diversified investment company, the Fund may invest a
greater proportion of its assets in the obligations of a smaller number of
issuers and, as a result,
56
will be subject to greater risk with respect to its portfolio securities.
Although, with respect to 50% of its assets, the Fund must diversify its
holdings in order to be treated as a regulated investment company under the
provisions of the Code, the Fund may be more susceptible to any single economic,
political or regulatory occurrence than would be the case if it had elected to
diversify its holdings sufficiently to be classified as a "diversified"
management investment company under the 1940 Act. See "Taxation - United States
Taxes."
Tax Considerations
The Fund intends to qualify and to continue to qualify as a regulated
investment company under the Code. If it so qualifies, it generally will be
relieved of U.S. Federal income tax on its net investment income and capital
gains, if any, which it generally distributes in accordance with requirements
under the Code. To the extent that the Fund has earnings available for
distribution, its distributions in the hands of stockholders generally are
expected to be treated as ordinary dividend income, although certain
distributions may be designated by the Fund as capital gain dividends which
would be treated as long-term capital gain. Dividends paid by the Fund (both
ordinary and capital) will not qualify for the corporate dividends-received
deduction. Distributions in excess of the Fund's investment company taxable
income and net capital gains will first reduce a stockholder's basis in his
shares and, after the stockholder's basis is reduced to zero, will constitute
capital gains to a stockholder who holds his shares as capital assets.
Subject to certain limitations imposed by the Code, foreign taxes withheld
from distributions or otherwise paid by the Fund may be creditable or deductible
by U.S. stockholders for U.S. income tax purposes, if the Fund is eligible to
and makes an election to treat the stockholders as having paid those taxes for
U.S. Federal income tax purposes. No assurance can be given that the Fund will
be eligible to make this election each year but it intends to do so if it is
eligible. If the election is made, the foreign withholding taxes paid by the
Fund will be includable in the U.S. Federal taxable income of stockholders.
Non-U.S. investors may not be able to credit or deduct the foreign taxes, but
they may be deemed to have additional income from the Fund, equal to their share
of the foreign taxes, that is subject to the U.S. withholding tax. Investors
should review carefully the information discussed under the heading "Taxation"
and should discuss with their tax advisers the specific tax consequences of
investing in the Fund.
Anti-Takeover Provisions
The Fund has provisions in its Articles that could have the effect of
limiting (i) the ability of other entities or persons to acquire control of the
Fund, (ii) the Fund's freedom to engage in certain transactions, and (iii) the
ability of the Fund's Directors or stockholders to amend the Articles or effect
changes in the Fund's management.
The Articles provide for a staggered election of those Directors who are
elected by the holders of Common Stock, with such Directors divided into three
classes, each having a term of three years. Accordingly, only those Directors in
one class may be changed in any one year and it would require two years to
change a majority of the Board of Directors. This system of electing Directors
may have the effect of maintaining the continuity of management and, thus, make
it more difficult for the Fund's Stockholders to change the majority of
Directors. Other provisions require the approval of holders of 80% of the
outstanding shares of the Common Stock and Preferred Stock voting together as a
single class to approve certain transactions including certain mergers, asset
dispositions and conversion of the Fund to open-end status. However, certain
provisions of the 1940 Act may nevertheless require a separate additional vote
of the holders of Preferred Stock.
57
Articles Supplementary approved by the Board of Directors subject the
Fund to certain provisions of the Maryland General Corporation Law with respect
to unsolicited takeovers. These provisions limit the ability of stockholders to
remove directors, provide that the number of directors may be fixed only by the
Board, provide that certain vacancies on the Board of Directors may be filled
only by the vote of the remaining directors, and limit the ability of
stockholders to call a special meeting of stockholders.
The foregoing provisions may be regarded as "anti-takeover" provisions
and may have the effect of depriving Stockholders of an opportunity to sell
their shares at a premium over prevailing market prices. See "Capital Stock -
Certain Provisions of the Articles, By-Laws and Articles Supplementary."
PORTFOLIO COMPOSITION
The following sets forth certain information with respect to the composition of
the Fund's investment portfolio (excluding $13,610,218 held in U.S. dollar,
Australian dollar, Canadian dollar, New Zealand dollar and Pound Sterling
denominated short-term investments) as of July 31, 2002 based on the then
applicable exchange rates shown in the table below:
---------------------------------------------------------
Exchange Rates
---------------------------------------------------------
Currency Currency per US$1
---------------------------------------------------------
United States Dollar N/A
---------------------------------------------------------
Australian Dollar A$0.5443
---------------------------------------------------------
New Zealand Dollar NZ$0.4689
---------------------------------------------------------
Canadian Dollar C$1.5843
---------------------------------------------------------
British Pound STG1.5622
---------------------------------------------------------
South Korean Won KRW1188.09
---------------------------------------------------------
Thai Baht THB42.02
---------------------------------------------------------
Philippines Peso PHP51.28
---------------------------------------------------------
Malaysian Ringgit MYR3.80
---------------------------------------------------------
Singapore Dollar SGD1.76
---------------------------------------------------------
The Portfolio
Number of Market Value % of long-
Australia Issues in U.S. dollars term assets
--------- ------ --------------- -----------
Australian Government Bonds .............................. 7 $ 7,205,168 6.84%
Australian Semi-Government Bonds ......................... 10 11,233,101 10.67%
Australian Supranational Bonds ........................... 1 2,197,218 2.09%
Australian Utilities Bonds ............................... 1 1,101,595 1.05%
Australian Corporate Non-bank Bonds ...................... 2 2,582,308 2.45%
----------- ------
Sub-total ................................................ 24,319,390 23.10%
Number of Market Value % of long-
Canada Issues in U.S. dollars term assets
------ ------ --------------- -----------
Canadian Government Bonds ................................ 5 9,942,620 9.44%
Canadian Semi-Government Bonds ........................... 6 6,072,724 5.77%
Canadian Banking and Finance Bonds ....................... 1 675,852 0.64%
----------- ------
Sub-total 16,691,196 15.85%
Number of Market Value % of long-
United Kingdom Issues in U.S. dollars term assets
-------------- ------ --------------- -----------
U.K. Government Gilts .................................... 8 29,369,989 27.89%
U.K. Utilities Bonds ..................................... 1 2,544,814 2.42%
U.K. Banking and Finance Bonds ........................... 4 5,580,383 5.30%
----------- ------
Sub-total ................................................ 37,495,186 35.61%
58
Number of Market Value % of long-
New Zealand Issues in U.S. dollars term assets
----------- ------ --------------- -----------
N.Z. Government Bonds .................................... 2 2,791,806 2.65%
N.Z. Utilities Bonds ..................................... 1 473,434 0.45%
N.Z. Banking and Finance Bonds ........................... 7 10,535,604 10.01%
N.Z. Corporate Non-Bank Bonds ............................ 1 737,610 0.70%
----------- ------
Sub-total ................................................ 14,538,454 13.81%
Number of Market Value % of long-
South Korea Issues in U.S. dollars term assets
----------- ------ --------------- -----------
South Korean Government Bonds ............................ 1 1,753,900 1.67%
----------- ------
Sub-total ................................................ 1,753,900 1.67%
Number of Market Value % of long-
Thailand Issues in U.S. dollars term assets
-------- ------ --------------- -----------
Thailand Government Bonds ................................ 4 814,865 0.77%
Thailand Utilities Bonds ................................. 1 131,684 0.13%
Thailand Corporate Non-Bank Bonds ........................ 1 63,277 0.06%
----------- ------
Sub-total ................................................ 1,009,826 0.96%
Number of Market Value % of long-
Philippines Issues in U.S. dollars term assets
----------- ------ --------------- -----------
Phillipine Government Bonds .............................. 2 362,468 0.34%
----------- ------
Sub-total ................................................ 362,468 0.34%
Number of Market Value % of long-
Malaysia Issues in U.S. dollars term assets
-------- ------ --------------- -----------
Malaysian Government Bonds ............................... 1 311,122 0.30%
Malaysian Semi-Government Bonds .......................... 1 456,774 0.43%
----------- ------
Sub-total ................................................ 767,896 0.73%
Number of Market Value % of long-
Singapore Issues in U.S. dollars term assets
--------- ------ --------------- -----------
Singapore Government Bonds ............................... 3 516,248 0.49%
Singapore Utilities Bonds ................................ 1 152,769 0.15%
----------- ------
Sub-total ................................................ 669,017 0.64%
Number of Market Value % of long-
United States Issues in U.S. dollars term assets
------------- ------ --------------- -----------
Yankee Bonds ............................................. 16 7,688,734 7.30%
----------- ------
Sub-total ................................................ 7,688,734 7.30%
Total long-term investments .............................. 105,296,067 100.0%
Moody's and/or S&P Ratings* % of total market value of
-------------------------- long-term portfolio
--------------------------
Aaa/AAA .................................................. 66.50%
Aa/AA .................................................... 14.72%
A/A ...................................................... 10.62%
Baa/BBB .................................................. 4.19%
Ba/BB .................................................... 2.55%
B/B ...................................................... 1.42%
------
Total Portfolio Rated by Moody's and/or S&P .............. 100.0%
----------
59
* Reflects the lower of the Moody's or S&P rating. S&P rating categories
may be further modified by a plus (+) or minus (-) in AA and A
ratings. Moody's rating categories may be further modified by 1
(highest), 2 or 3 (lowest) in Aa and A ratings.
MANAGEMENT OF THE FUND
Directors and Officers
The Fund's Articles provide that the Directors to be elected by holders
of the Fund's Common Stock will be divided into three classes, as nearly equal
in number as possible, each of which will serve for three years with one class
being elected each year. Each year, the term of one class expires. Section 18 of
the 1940 Act requires that the holders of the Preferred Stock, voting separately
as a single class, have the right to elect at least two Directors at all times.
The officers of the Fund serve at the pleasure of the Board of Directors.
Although the Fund is a Maryland corporation, certain of its Directors
and officers (Messrs. Bignell, Elsum, Freedman, Gilbert, Karagianis, Miles,
Pittard, Randall, Sacks, Schrafl, Scott, Smith and Young) are non-residents of
the United States and have all, or a substantial part, of their assets located
outside the United States. None of the Directors or officers has authorized an
agent for service of process in the United States. As a result, it may be
difficult for U.S. investors to effect service of process upon the Directors and
officers within the United States or to effectively enforce judgments of courts
of the United States predicated upon civil liabilities of the Directors or
officers under the Federal securities laws of the United States. The Fund has
been advised by local counsel in the jurisdictions in which the Fund's Directors
and officers reside, other than those listed below, that it is unlikely that the
courts of those jurisdictions would adjudge civil liability against Directors
and officers resident in those jurisdictions in an original action predicated
solely on a violation of the Federal securities laws of the United States.
Although there is no arrangement in place between those jurisdictions and the
United States for the reciprocal enforcement of judgments, a judgment against
the Directors and officers in an original action predicated on such provisions
rendered by a court in the United States would be enforceable by action or
counterclaim or be recognized by the courts of those jurisdictions as a defense
to an action or as conclusive of an issue in that action unless obtained by
fraud or otherwise than in accordance with the principles of natural justice or
unless contrary to public policy or unless the proceedings in the United States
court were not duly served on the defendant in the original action. There is
doubt as to the enforceability in Australia, Canada, ________ and ________, the
countries in which other Directors and officers are resident, of these civil
liability provisions, whether or not the liabilities are based upon judgments of
courts in the United States or are pursuant to original actions.
The By-Laws of the Fund provide that the Fund will indemnify Directors
and officers of the Fund against liabilities and expenses, including the
advancement of expenses, actually and reasonably incurred in connection with
claims or litigation in which they may be involved because of their offices with
the Fund. Neither the Article of Incorporation nor the By-Laws of the Fund
protects or indemnifies a Director or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
The names of the Directors and officers of the Fund, their addresses,
ages and principal occupations during the past five years are provided in the
tables below. Directors that are deemed "interested persons" (as that term is
defined in Section 2(a)(19) of the 1940 Act) of the Fund, the Investment
Manager, the Investment Adviser and the Dealer Managers are included in the
table titled "Interested Directors." Directors who are not interested persons as
described above are referred to as Independent Directors.
60
Interested Directors
------------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
------------------------------------------------------------------------------------------------------------------------------------
Laurence S. Freedman* Class I Term Mr. Freedman has over 35 3 Chairman, (from 1995 to 2001),
25 Lime Street Director expires years of experience in funds President (from 1985 to 2000)
Suite 405 2005; management with a focus on and Director (since 1985),
Sydney, NSW 2000 Director global investment analysis. Aberdeen Australia Equity Fund,
Australia since Prior to founding EquitiLink Inc.; Chairman (from 1995 to
1992 in 1981, he was Director of 2000), Vice President (from 1986
Age: 59 Investment at BT Australia to 2001) and Director (from 1986
Limited. Mr. Freedman's to 2000), Aberdeen Asia-Pacific
areas of fund management Income Fund, Inc.; Joint
specialization include Managing Director, Aberdeen
investment in resource and Asia-Pacific Income Investment
development companies, Company Limited (from 1986 to
international economies and 2001); Joint Managing Director,
the geo-political impact on EquitiLink Limited (holding
investment markets. He was company) (from 1986 to 2000);
Chairman of the Fund from Director, EquitiLink Holdings
2000 to 2001 and President of Pty. Limited (holding company)
the Fund to 2001. He was (since 1998); Director, Aberdeen
founder of the Fund's Leaders Limited (investment
Investment Adviser, and until company) (since 1987); Director
December 2000, he was Joint (from 1994 to 2002), EquitiLink
Managing Director of the eLink Limited (investment
Fund's Investment Adviser and company) (from 1998 to 2002);
a Director of the Fund's Director, Ten Network Holdings
Investment Manager. Limited (television network)
(since 1998); Director, EIML
Australia Pty. Limited
(investment company) (since
2000); Chairman, Link
Enterprises (International) Pty.
Ltd.; Director, Telecasters
North Queensland Ltd. (from 1992
to 1998); Director, Link Traders
Pty. Ltd.; Director, Link
Traders (Aust) Pty. Ltd.;
Director, Letota Pty. Ltd.;
Director, EquitiLink
International Management Limited
(from 1995 to 2000).
------------------------------------------------------------------------------------------------------------------------------------
Martin J. Gilbert* Chairman Term as Mr. Gilbert is the Chief 2 Chairman of the Board and
One Albyn Place of Board, Director Executive and an Executive Director, Aberdeen Asia-Pacific
Aberdeen, AB10 1YG Class III expires Director of Aberdeen Asset Income Fund, Inc. (since 2001);
United Kingdom Director 2004; Management PLC, which was Director, Aberdeen Asia-Pacific
Director established in 1983 and is the Income Investment Company
Age: 47 since parent company of the Fund's Limited (since 2000); Director,
2001 Investment Manager and Aberdeen Asia-Pacific Income
Investment Adviser. He is one Investment Company Limited
of the founding directors of (since 2000); Director, Aberdeen
Aberdeen Asset Management PLC Asset Management Holdings
and has been involved in the Limited (since 2000); Director,
investment management industry Aberdeen Asian Smaller Companies
since 1982, after he qualified Investment Trust PLC (since
as a chartered accountant. He 1995); Director, Aberdeen Asset
has
------------------------------------------------------------------------------------------------------------------------------------
61
-------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
-------------------------------------------------------------------------------------------------------------------------------
been Chairman of the Board Management Asia Limited (since
of the Fund and of Aberdeen 1991); Director, Aberdeen Asset
Asia-Pacific Income Fund, Inc. Management Ireland Limited
since 2001. He has been a (since 1998); Director, Aberdeen
Director of Aberdeen Asset Asset Managers Jersey Limited
Management Limited (the Fund's (since 1999); Director, Aberdeen
Investment Adviser) and Asset Managers Limited (since
Aberdeen Asset Managers (C.I.) 1987); Director, Aberdeen
Limited (the Fund's Investment Convertible Income Trust PLC
Manager) since 2001. (since 1995); Director, Aberdeen
Development Capital PLC (since
1986); Director, Aberdeen
Emerging Asia Investment Trust
Limited (since 1990);
Director, Aberdeen Emerging
Economies Investment Trust PLC
(since 1993); Director,
Aberdeen Football Club PLC
(since 1997); Director,
Aberdeen Fund Managers, Inc.
(since 1995); Director,
Aberdeen Global (since 1998);
Director, Aberdeen Graham
Asset Management Limited
(since 1999); Director,
Aberdeen Growth VCT I PLC
(since 2001); Director,
Aberdeen International Fund
Managers Limited (since 1998);
Director, Aberdeen
International Fund PLC (since
1997); Director, Aberdeen
Private Investors Limited
(since 2001); Director,
Aberdeen Property Investors
International Limited (since
2001); Director, Aberdeen
Umbrella Cash Fund PLC (since
1998); Director, Aberdeen Unit
Trust Managers Limited (since
1987); Director, Aberdeen Fund
Managers Ireland Limited
(since 2000); Director, APFM
Wind-Up Limited (since 1994);
Director, Argosy Asset
Management Luxembourg SA
(since 1991); Director, Asset
Value Investors Limited (since
2001); Director, Balgranach
Properties Limited (since
1998); Director, Bogey One
Limited (since 1998);
Director, Broadgate Investment
Trust PLC (since 1995);
Director, Chaucer Holdings PLC
(since 1993); Director,
FirstGroup PLC (since 1995);
Director, Grampian Country
Food Group Limited (since
1996); Director, Healthcare
Reform Investment Trust PLC
(since 1996); Director, Inner
Workings Group
--------------------------------------------------------------------------------------------------------------------------------
62
----------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
----------------------------------------------------------------------------------------------------------------------------------
PLC (since 1999); Director, Jersey
Phoenix Trust Limited (since 1999);
Director, Lombard International
Assurance SA (since 1991); Director,
Murray Johnstone Holdings Limited (since
2001); Director, Murray Johnstone
International Limited (since 2001);
Director, Murray Johnstone Limited
(since 2001); Director, Murray Johnstone
Unit Trust Management Limited (since
2001); Director, New Asia (Isle of Man)
Limited (since 1996); Director, Phoenix
Aberdeen International Advisors LLC
(since 1996); Director, Primary Health
Properties PLC (since 1996); Director,
Property Management Employment Services
Limited (since 2000); Director, Property
Partners (Two Rivers) Limited (since
2001); Director, Property Partners
(Whitgift) Limited (since 2000);
Director, Regent Property Partners
(Residential) Limited (since 2000);
Director, Regent Property Partners
(Retail Parks) Limited (since 2000);
Director, Regent Retail Parks (St.
John's Wolverhampton) Limited (since
2001); Director, Scottish Medicine PLC
(since 1998); Director, Templar Hotels
LTD (since 1990); Director, Tenon
Nominees Limited (since 1987); Director,
The London Market Fund PLC (since 1999);
Director, The Tavemers Trust PLC (since
2000); Director, Themis Investment
Management Limited (since 2000);
Director, Aberdeen Emerging Economies
Investment Trust PLC (since 1993);
Director, Aberdeen Growth VCT I (since
2001); Director, Aberdeen Property
Investors UK Limited (since 2001);
Director, Aberdeen International India
Opportunities Fund (Mauritius) Limited;
Director, Aberdeen Latin American
Investment Trust PLC (from 1994 to
1998); Director, Aberdeen New Thai
Investment Trust PLC (from 1989 to
2000); Director, Aberdeen Investment
Services SA (from 1998 to 2000);
Director, Aberdeen High
----------------------------------------------------------------------------------------------------------------------------------
63
----------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
----------------------------------------------------------------------------------------------------------------------------------
Income Trust PLC (from 1994 to 1999);
Director, Aberdeen Preferred Income
Trust PLC (from 1997 to 1998);
Director, Aberdeen Growth VCT II PLC
(from 2001 to 2002); Director, AM
Wind-Up Limited (1997 to 1998);
Director, Aberdeen Property Investors
Limited (from 2000 to 2002); Director,
Arthur House (No 10) Limited (from 1997
to 1998); Director, PFM Developments
Limited (during 1998); Director,
Prolific Objective Asset Management
Limited (during 1999); Director,
Prolific Objective Limited (from 1997
to 1999); Director, Prolific Technology
Limited (from 1997 to 1998); Director,
Prolific Unit Trust Nominees Limited
(from 1997 to 1998); Director, The
Taverners Trust PLC (from 1996 to
2000); Director, UTM Wind-Up II Limited
(from 1997 to 2000); Director, UTM
Wind-Up Limited (from 1997 to 2000);
Director, Aberdeen Atlas Fund (from
1991 to 1999); Director, Aberdeen
Capital Management International
Limited (from 1998 to 1999); Director,
Abtrust Pointon Pension Fund Managers
Limited (from 1995 to 2000); Director,
Abtrust Securities Limited (from 1991
to 1999); Director, Archer Dedicated
PLC (from 1995 to 1998); Director,
Arthur House (No 9) Limited (from 1990
to 1998); Director, Arthur House
Management Limited (from 1995 to 1999);
Director, CGA Nominees Limited (from
1991 to 1998); Director, Criterion
Properties PLC (from 1993 to 2000);
Director, Easyfollow Limited (from 1990
to 2000); Director, Grampian Enterprise
Limited (from 1997 to 2001); Director,
Old Mutual Services Company (IOM)
Limited (during 2002); Director,
Pointon York Nominees Limited (from
1994 to 2001); Director, Prosperity
Investment Management Limited (during
1998); Director, The Turkey Trust PLC
(from 1996 to 1998); Director,
Prosperity Unit Trust
----------------------------------------------------------------------------------------------------------------------------------
64
----------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
----------------------------------------------------------------------------------------------------------------------------------
Management Limited (from 1994
to 1998).
----------------------------------------------------------------------------------------------------------------------------------
-------------------------
* Mr. Freedman is deemed to be an interested person because of his
ownership of securities of Aberdeen Asset Management PLC, the parent
company of the Fund's Investment Manager and Investment Adviser. Mr.
Gilbert is deemed to be an interested person because of his affiliation
with the Fund's Investment Manager and Investment Adviser.
Independent Directors
----------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
----------------------------------------------------------------------------------------------------------------------------------
Term
David L. Elsum, A.M.+ Class I expires Mr. Elsum has over 20 years of 3 Director, Aberdeen Australia
9 May Grove Director 2005; experience in investment and Equity Fund, Inc. (since 1985),
South Yarra, Victoria 3141 Director insurance markets. He was a Aberdeen Asia-Pacific Income
Australia since member of the Corporations and Fund, Inc. (since 1986), and
1992 Securities Panel of the Aberdeen Asia-Pacific Income
Age: 64 Australian Securities Investment Company Limited
Commission until 2000, was a (since 1986); Chairman, Audit
member of the Australian Victoria (government statutory
Federal Government authority) (from 1997 to 2000);
Administrative Appeals Chairman, Melbourne Wholesale
Tribunal until 2001, and has Fish Market Pty. Ltd.; Chairman,
been a member of the State of Queen Victoria Market Pty. Ltd.
Victoria Regulator-General (municipal market); Director,
Appeal Panel since 2001. Mr. Financial Planning Association
Elsum is Chairman of Stodart Limited (industry association);
Investment Pty. Ltd. Director, Aberdeen Leaders
Previously, he was founding Limited (investment company).
Managing Director of Capel
Court Investment Bank.
Subsequently, Mr. Elsum was
Chief Executive of several
major public companies
including The MLC Limited
(insurance) and President of
the State of Victoria
Superannuation Fund (pension
fund management).
----------------------------------------------------------------------------------------------------------------------------------
65
----------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
----------------------------------------------------------------------------------------------------------------------------------
Neville J. Miles. Class III Term Mr. Miles has over 20 years of 3 Director, Aberdeen Australia
2 Paddington Street Director expires international investment Equity Fund, Inc. (since 1996),
Paddington, NSW 2021 2004; banking experience. He was Aberdeen Asia-Pacific Income
Australia Director formerly head of Corporate Fund, Inc. (since 1996), and
since Treasury at Westpac Banking Aberdeen Asia-Pacific Income
Age: 56 1999 Corporation and Managing Investment Company Limited
Director of Ord Minnett (since 2000); Director, Aberdeen
Securities Limited Leaders Limited (investment
(stockbrokers). Mr. Miles has company); Executive Director,
extensive experience in the EL&C Ballieu Limited
areas of corporate (stockbrokers) (from 1994 to
acquisitions and equity 1997); Director, Ballyshaw Pty.
offerings. He is currently an Ltd. (investing/consulting);
investor and real estate Director, Dawnglade Pty. Ltd.
developer. (real estate investment);
Director, Villepen Pty. Ltd.
(real estate development) (since
1999); Director, Sonic
Communications Pty. Ltd. (since
2000); Director, ComSecure Limited
(since 2002).
----------------------------------------------------------------------------------------------------------------------------------
William J. Potter+++. Class II Term Mr. Potter has extensive 3 Director, Aberdeen Australia
236 West 27th Street Director expires experience in investment Equity Fund, Inc. (since 1985),
3/rd/ Floor 2003; banking and fund management. Aberdeen Asia-Pacific Income
New York, NY 10001 Director Mr. Potter has held senior Fund, Inc. (since 1986), and
since positions with Toronto Aberdeen Asia-Pacific Income
Age: 54 1992 Dominion Bank, Barclays Bank Investment Company Limited
PLC, and Prudential (since 1986); President,
Securities, Inc., as well as Ridgewood Group International
board of director positions Ltd. (international consulting
with investment funds and merchant banking company)
involving over $20 billion in (since 1989); President,
assets since 1983. Mr. Ridgewood Capital Funding, Inc.
Potter has been involved in (private placement securities
the Australian capital firm) (since 1989); Director,
markets since 1974, including International Panorama, Inc.
management and board of (mining) (since 1994);
director positions with a Director, National Foreign Trade
noted Australian brokerage Counsel (trade association)
house. Mr. Potter is (since 1984); Director,
President of a U.S. Alexandria Bancorp (banking
investment bank and has group in Cayman Islands) (since
securities licenses in both 1991); Director, Vanstone
the U.S. and Canada. Mr. Investments (software) (since
Potter also has extensive 1990); Director, E.C. Power,
securities underwriting Inc. (energy company) (since
experience in various capital 1996); Director, Serapec S.A.
markets with an emphasis on (energy company) (since 1996).
natural resources.
----------------------------------------------------------------------------------------------------------------------------------
66
------------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
------------------------------------------------------------------------------------------------------------------------------------
Peter D. Sacks++ Class II Term Mr. Sacks is currently 3 Director, Aberdeen Australia
445 King Street West, Director expires Managing Partner of Toron Equity Fund, Inc. (since 1999),
4/th/ Floor 2003; Capital Markets, Inc., a Aberdeen Asia-Pacific Income
Toronto, Ontario M5V 1K4 Director company he established in Fund, Inc. (since 1993), and
Canada since 1998 to design and manage Aberdeen Asia-Pacific Income
1992 customized equity, fixed Investment Company Limited
Age: 57 income and currency (since 1998); Director, First
portfolios for individual and Horizon Holdings (since 1998);
corporate. Mr. Sacks also Director, First Horizon Capital
serves on the Boards of Corp. (since 1998); Director,
Directors of Toron Capital Cirrus Financial Concepts Inc
Markets, Inc., Toron Capital (since 1998).
Management, Ltd. and Toron
Asset Management, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Dr. Anton E. Schrafl Preferred Term Dr. Schrafl was Deputy 2 Director, Aberdeen Asia-Pacific
Wiesenstrasse 7 Stock expires Chairman of Holcim Limited, Income Fund, Inc. (since 1993)
CH-8001 Zurich Director 2003; a global manufacturer and and Aberdeen Asia-Pacific Income
Switzerland Director distributor of cement and Investment Company Limited
since allied products until May (since 1998).
Age: 70 1993 2002. He also serves on the
Board of Directors of
Organogenesis, Inc., a
medical products company
involved in
biotechnological tissue
engineering, and Apogee
Technology Inc., a
manufacturer of digital
amplifiers.
------------------------------------------------------------------------------------------------------------------------------------
E. Duff Scott++ Class I Term Mr. Scott is currently 1 Director, Aberdeen Asia-Pacific
8 Sunnydene Crescent Director expires President of Multibanc Income Investment Company
Toronto, Ontario M4N 3J6 2005; Financial Corporation and Limited (since 1989); President,
Canada Director Multibanc NT Financial Multibanc Financial Corporation
since Corporation, investment and Multibanc NT Financial
Age: 65 1992 holding companies. He also Corporation (investment holding
serves as Chairman of QLT companies) (since 1990);
Inc., a biopharmaceutical Chairman, QLT Inc.
company. Previously, Mr. (biopharmaceuticals) (since
Scott was Chairman of Peoples 1991); Director, Perle Systems,
Jewelers Corporation (retail Inc. (computers) (since 1997);
jeweler) and Chairman of the Director, Lions Gate Entertainment
Toronto Stock Exchange. (media) (since 2001); Director,
Becker Milk Company (real estate);
Director, Telco Split Co. (split
share company); Director, Simmons
Income Trust.
------------------------------------------------------------------------------------------------------------------------------------
67
--------------------------------------------------------------------------------------------------------------------------------
Number
Term of of Funds
Office in Fund
and Complex
Position(s) Length Overseen
Name, Address Held With of Time Principal Occupation(s) by Other Directorships Held by
and Age the Fund Served During Past Five Years Director Director
--------------------------------------------------------------------------------------------------------------------------------
John T. Sheehy+. Preferred Term Mr. Sheehy has over 30 years' 3 Director, Aberdeen Australia
560 Sylvan Avenue Stock expires experience in investment Equity Fund, Inc. (since 1985),
Englewood Cliffs, NJ Director 2003; banking with companies such Aberdeen Asia-Pacific Income
07632 Director as J.P. Morgan & Company and Fund, Inc. (since 1986), and
since Bear, Stearns & Co. Inc. His Aberdeen Asia-Pacific Income
Age: 59 1992 specialty areas include Investment Company Limited
securities valuation, public (since 1986); Member, The Value
offerings and private Group LLC (private equity)
placements of debt, and (since 1997); Director, Video
equity securities, mergers City, Inc. (video retail
and acquisitions and merchandising) (since 1997);
management buyout Managing Director, Black & Co.
transactions. He has been (investment banking) (from 1996
Senior Managing Director of to 1997); Director, Cross Point
B.V. Murray and Company Foods, Corp. (from 2000 to 2001).
(investment banking) since
2001.
--------------------------------------------------------------------------------------------------------------------------------
Warren C. Smith Class III Term Mr. Smith is a Managing 1 Director, Aberdeen Asia-Pacific
1002 Sherbrooke St. West Director expires Editor with The Bank Credit Income Investment Company
Suite 1600 2004; Analyst Research Group, Limited (since 1993); Managing
Montreal, Quebec H3A 3L6 Director independent publishers of Editor, BCA Publications Ltd.
Canada since financial market research. (financial publications,
1992 Since 1982, he has helped including The Bank Credit
Age: 47 direct the firm's investment Analyst) (since 1982);
strategy, and has been editor
of several U.S. and
international publications.
Mr. Smith has also developed
and edited new institutional
research products since 1989.
Mr. Smith lectures to
investment groups around the
globe.
--------------------------------------------------------------------------------------------------------------------------------
-------------------------
+ Messrs. Elsum, Potter, Sacks and Sheehy are members of the Contract
Review Committee.
++ Messrs. Potter, Sacks and Scott are members of the Audit and
Valuation Committee.
. Messrs. Miles, Potter and Sheehy are members of the Nominating
Committee.
Officers Who Are Not Directors
--------------------------------------------------------------------------------------------------------------------------------
Position(s) Term of Office*
Held With and Length of
Name, Address and Age the Fund Time Served Principal Occupation(s) During Past Five Years
--------------------------------------------------------------------------------------------------------------------------------
Hugh Young President Since 2001 Managing Director (since 1991) of Aberdeen Asset Management PLC
21 Church Street (parent company of the Fund's Investment Manager and Investment
#01-01 Capital Square Two Adviser), Managing Director (since 1992) of Aberdeen Asset
Singapore 0490480 Management Asia Limited (affiliate of the Fund's Investment
Manager and Investment Adviser), Managing Director (since 2000)
Age: 44 of Aberdeen International Fund Managers Limited (affiliate of
the Fund's Investment Manager and Investment Adviser), Director
(since 2001) of the Investment Manager and the Investment
Adviser.
Mr. Young holds the following positions: Director, Aberdeen
Australia
--------------------------------------------------------------------------------------------------------------------------------
68
---------------------------------------------------------------------------------------------------------------------------------
Position(s) Term of Office*
Held With and Length of
Name, Address and Age the Fund Time Served Principal Occupation(s) During Past Five Years
---------------------------------------------------------------------------------------------------------------------------------
Equity Fund, Inc. (since 2001); Director, Aberdeen Asset
Management Holdings Limited (since 2000); Director, Aberdeen
Asia Total Return (since 1998); Director, Aberdeen Asian
Smaller Companies Investment Trust PLC (since 1995);
Director, Aberdeen Emerging Asia Investment Trust Limited
(since 1990); Director, Aberdeen Asset Management Asia
Limited (since 1991); Director, Aberdeen India Fund Limited
(since 1996); Director, Aberdeen Islamic Fund Managers
Limited (since 2000); Director, Aberdeen New Dawn Investment
Trust PLC (since 1989); Director, Aberdeen New Thai
Investment Trust PLC (since 1989); Director, Aberdeen
International Fund Managers Limited (since 1998); Director,
Aberdeen International Management Ireland Limited (since
2000); Director, Apollo Europe Fund Limited (since 1996);
Director, Apollo Investment Management Limited (since 1994);
Director, Apollo Hedge Fund Limited (since 1996); Director,
Apollo Japan Fund Limited (since 1995); Director, Apollo
Tiger Fund Limited (since 1994); Director, Apollo Californian
Fund Limited (since 1997); Director, JF Philippine Fund
Limited (since 1991); Director, Phoenix-Aberdeen
International Advisors LLC (since 1996); Director, Apollo
Protector Fund Limited (since 1994); Director, Aberdeen
Global (since 1998); Director, Aberdeen PCC Limited (since
2000); Director, Aberdeen Guernsey Limited (since 1999);
Director, The London Market Fund PLC (since 1999); Director,
Aberdeen Goh Equity Private PTE Limited (since 2001);
Director, Murray Johnstone Asia Limited (since 2000); Senior
Vice President, Phoenix-Aberdeen Series Fund (since 1996);
Director, Aberdeen Goh Private Equity Fund 1 Pte Limited
(since 2001); Director, MIMB Aberdeen Asset Management Sdn
Bhd (since 1998); Director, Aberdeen Asset Management Company
Limited (since 2002).
---------------------------------------------------------------------------------------------------------------------------------
Christian Pittard Treasurer Since 2001 Managing Director (since 2001) of the Fund's Investment Manager;
P.O. Box 641 and Managing Director (since 1998) of Aberdeen Graham Asset
One Seaton Place Assistant Management Ltd. (affiliate of the Fund's Investment Manager and
St. Helier, Jersey JE4 8YJ Secretary Investment Adviser); Managing Director (since 1998) of Aberdeen
Channel Islands Private Wealth; Chartered Accountant (1994-1998), KPMG and
Quorum Trust Group (1998).
Age: 29
Mr. Pittard holds the following positions: Director, Aberdeen
Asset Managers Jersey Limited (since 1999); Director,
Aberdeen Guernsey Limited (since 2001); Director, Aberdeen
PCC Limited (since 2001); Director, Beta Gran Caribe Limited
(since 2001); Director, Pelas Limited (since 2000); Director,
Insurance Development Holdings A.G. (since 2000).
---------------------------------------------------------------------------------------------------------------------------------
69
------------------------------------------------------------------------------------------------------------------------------------
Position(s) Term of Office*
Held With and Length of
Name, Address and Age the Fund Time Served Principal Occupation(s) During Past Five Years
------------------------------------------------------------------------------------------------------------------------------------
Simon Bignell Assistant Since 2001 Director (since 2001) of the Fund's Investment Manager; Director
P.O. Box 641 Treasurer (1995-2001) of Kleinwort Benson (Jersey) Fund Managers Limited
One Seaton Place (fund administration).
St. Helier, Jersey JE4 8YJ
Channel Islands
Age: 41
------------------------------------------------------------------------------------------------------------------------------------
James Blair Assistant Since 2002 Director, Head of Regional Fixed Income, Aberdeen Asset
21 Church Street #01-01 Vice Management Asia and Aberdeen Asset Management Limited; Director,
Capital Square Two President Aberdeen Asset Management Asia (since 2001); Director, Aberdeen
Singapore 049480 Asset Management Limited (since 2001); Director, Head of Fixed
Income, EquitiLink Investment Management (from 1997 to 2001).
Age: 36
------------------------------------------------------------------------------------------------------------------------------------
Michael Karagianis Assistant Since 2001 Vice President (since 2002) and Assistant Vice President (from
One Bow Churchyard Vice 2001 to 2002) of the Fund; Director of Economics and Investment
London EC4M 9HH President Strategy (since 1999) of the Fund's Investment Adviser; Director
United Kingdom of Portfolio Investment (1995-1999) of County Investment Management;
Director, Ashmede Pty. Ltd. (since 1997).
Age: 37
------------------------------------------------------------------------------------------------------------------------------------
Beverley Hendry Assistant Since 2001 Executive Director (since 1991) of Aberdeen Asset Management PLC
300 Las Olas Place Treasurer (parent company of the Fund's Investment Manager and Investment
300 S.E. 2nd Street Adviser), Director (since 2001) of the Fund's Investment
Suite 820 Manager, Chief Executive Officer (since 1995) of Aberdeen Fund
Ft. Lauderdale, FL 33301 Managers, Inc. (affiliate of the Fund's Investment Manager and
Investment Adviser), Director (since 2001) of Aberdeen Asia-Pacific
Income Fund, Inc.
Age: 48
------------------------------------------------------------------------------------------------------------------------------------
Timothy Sullivan Assistant Since 2001 Vice-President, Aberdeen Fund Managers, Inc. (doing business
45 Broadway, 31/st/ Floor Treasurer under the name Aberdeen Asset Management Investor Relations)
New York, NY 10006 (investor relations service provider and affiliate of the Fund's
Investment Manager and Investment Adviser); Managing Director
(1995-2002) of EquitiLink USA, Inc. (former investor relations
Age: 41 service provider and affiliate of the Fund's Investment Manager
and Investment Adviser); Vice President (1997-1999) of the Bank
of New York.
------------------------------------------------------------------------------------------------------------------------------------
Roy M. Randall Secretary Since 1992 Partner of Stikeman, Elliott, Australian and Canadian counsel to
Level 40, Chifley Tower the Fund.
Two Chifley Square
Sydney, NSW 2000
Australia
Age: 66
------------------------------------------------------------------------------------------------------------------------------------
Allan S. Mostoff Assistant Since 1992 Partner of Dechert, U.S. counsel to the Fund and the Investment
1775 Eye Street, N.W. Secretary Manager and Investment Adviser.
Washington, DC 20006
Age: 70
-----------------------------------------------------------------------------------------------------------------------------------
70
----------------------------------------------------------------------------------------------------------------------------------
Position(s) Term of Office*
Held With and Length of
Name, Address and Age the Fund Time Served Principal Occupation(s) During Past Five Years
----------------------------------------------------------------------------------------------------------------------------------
Sander M. Bieber Assistant Since 1999 Partner of Dechert, U.S. counsel to the Fund and the Investment
1775 Eye Street, N.W. Secretary Manager and Investment Adviser.
Washington, DC 20006
Age: 52
----------------------------------------------------------------------------------------------------------------------------------
Margaret A. Bancroft Assistant Since 1992 Partner of Dechert, U.S. counsel to the Fund and the Investment
30 Rockefeller Plaza Secretary Manager and Investment Adviser.
New York, NY 10112
Age: 64
----------------------------------------------------------------------------------------------------------------------------------
-------------------------
* Officers hold their positions with the Fund until a successor has been
duly elected and qualified. Officers are generally elected annually at
the meeting of the Board of Directors next following the annual
meeting of stockholders. The officers were last elected on June 19,
2002.
Ownership of Securities
As of the date of this Prospectus, the Fund's Directors and executive
officers, as a group, owned less than 1% of the Fund's outstanding shares of
Common Stock, and no shares of the Fund's Preferred Stock. The information as to
ownership of securities which appears below is based on statements furnished to
the Fund by its Directors and executive officers.
For the period ended December 31, 2001, the dollar range of equity
securities owned beneficially by each Director in the Fund and in any registered
investment companies overseen by the Director within the same family of
investment companies as the Fund is as follows:
Interested Directors
--------------------
--------------------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Dollar Range of Equity Companies Overseen by Director in Family
Name of Director Securities in the Fund of Investment Companies
--------------------------------------------------------------------------------------------------------
Laurence S. Freedman 0 10,001-50,000
--------------------------------------------------------------------------------------------------------
Martin J. Gilbert 0 0
--------------------------------------------------------------------------------------------------------
Hugh Young 0 0
--------------------------------------------------------------------------------------------------------
Independent Directors
---------------------
--------------------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Dollar Range of Equity Companies Overseen by Director in Family
Name of Director Securities in the Fund of Investment Companies
--------------------------------------------------------------------------------------------------------
David L. Elsum 1-10,000 10,001-50,000
--------------------------------------------------------------------------------------------------------
Neville J. Miles 1-10,000 10,001-50,000
--------------------------------------------------------------------------------------------------------
William J. Potter 0 1-10,000
--------------------------------------------------------------------------------------------------------
Peter D. Sacks 1-10,000 1-10,000
--------------------------------------------------------------------------------------------------------
Dr. Anton E. Schrafl 0 0
--------------------------------------------------------------------------------------------------------
E. Duff Scott 10,001-50,000 10,001-50,000
--------------------------------------------------------------------------------------------------------
John T. Sheehy 0 10,001-50,000
--------------------------------------------------------------------------------------------------------
Warren C. Smith 50,001-100,000 50,001-100,000
--------------------------------------------------------------------------------------------------------
71
Messrs. Hugh Young and Christian Pittard serve as executive officers of
the Fund. As of December 31, 2001, the executive officers of the Fund owned no
shares of the Fund's Common Stock or Preferred Stock.
Board Committees and Meetings
The Board of Directors has a standing Audit and Valuation Committee,
composed entirely of Directors who are not "interested persons" (as that term is
defined in Section 2(a)(19) of the 1940 Act) of the Fund or the Fund's
Investment Manager or Investment Adviser ("Independent Directors") and who are
"independent" as defined in the NYSE listing standards. The Audit and Valuation
Committee reviews both the audit and non-audit work of the Fund's independent
public accountants, submits recommendations to the Board of Directors as to the
selection of independent public accountants and reviews compliance of the Fund
with regulations of the SEC and the Internal Revenue Service, and other related
matters.
The Fund adopted an Audit Committee Charter on March 16, 2000, and on
December 11, 2001 amended this charter to be an Audit and Valuation Committee
Charter. The Audit and Valuation Committee has received the written disclosures
and the letter required by Independence Standards Board Standard No. 1 from
PricewaterhouseCoopers LLP ("PwC"), the Fund's independent accountants, and has
discussed with PwC its independence. The Audit and Valuation Committee has also
reviewed and discussed the audited financial statements with Fund management and
PwC, and discussed certain matters with PwC required to be discussed by
Statement on Auditing Standards No. 61. Based on the foregoing, the Audit and
Valuation Committee recommended to the Board of Directors that the Fund's
audited financial statements be included in the Fund's Annual Report to
Shareholders for the fiscal year ended October 31, 2001. The members of the
Fund's Audit and Valuation Committee are Messrs. William J. Potter, Peter D.
Sacks and E. Duff Scott.
The Board of Directors also has a standing Contract Review Committee,
composed entirely of Independent Directors. The Contract Review Committee
reviews and makes recommendations to the Board with respect to entering into,
renewal or amendment of the Fund's management agreement, advisory agreement,
administration agreement, investor relations services agreement and other
agreements. The members of the Fund's Contract Review Committee are Messrs.
David L. Elsum, William J. Potter, Peter D. Sacks and John T. Sheehy.
The Board of Directors also has a standing Nominating Committee,
composed entirely of Independent Directors. The Nominating Committee considers
candidates for service as Fund directors and remuneration to be paid to Fund
directors. The Nominating Committee will not consider nominees recommended by
security holders. The members of the Fund's Nominating Committee are Messrs.
Neville J. Miles, William J. Potter and John T. Sheehy.
During the Fund's fiscal year ended October 31, 2001, the Board of
Directors held four regularly scheduled meetings and one special meeting, the
Audit Committee held two meetings, the Contract Review Committee held one
meeting, and the Nominating Committee held one meeting.
Compensation of Directors and Certain Officers
The following table sets forth information regarding compensation of
Directors by the Fund and by the fund complex of which the Fund is a part for
the fiscal year ended October 31, 2001. Officers of the Fund and Directors who
are interested persons of the Fund do not receive any compensation directly from
the Fund or any other fund in the fund complex for performing their duties as
officers or directors, respectively. In the column headed "Total Compensation
From Fund and Fund Complex Paid to Directors,"
72
the number in parentheses indicates the total number of boards in the fund
complex on which the Director serves or served at any time during the fiscal
year ended October 31, 2001. In June 2001, the Board of Directors, upon the
recommendation of the Fund's Nominating Committee, approved an increase in the
fees payable to each Independent Director of the Fund from an $8,000 per year
retainer fee, a fee of $1,000 per meeting for attendance at in-person Board
meetings, and a fee of $1,000 per meeting for attendance at telephonic Board
meetings, to an aggregate fee of $16,000 per year. Members of the Fund's Audit
Committee, Contract Review Committee, and Nominating Committee receive a fee of
$500 per committee meeting attended, and the Chairman of each of these
Committees receives an additional fee of $500 per committee meeting attended.
Compensation Table
Fiscal Year Ended October 31, 2001
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual From Fund and
Compensation As Part of Benefits Upon Fund Complex
Name of Director From Fund Fund Expenses Retirement Paid to Directors
--------------- ----------------- --------------- ------------------
David L. Elsum ............... $ 15,500 N/A N/A $ 53,625/(3)/
Lawrence S. Freedman++ ....... $ 0 N/A N/A $ 0/(3)/
Martin J. Gilbert ............ $ 0 N/A N/A $ 0/(2)/
Michael Gleeson-White* ....... $ 2,110 N/A N/A $ 2,110/(1)/
Neville J. Miles ............. $ 15,500 N/A N/A $ 54,125/(3)/
William J. Potter ............ $ 17,500 N/A N/A $ 55,625/(3)/
Sir David Rowe-Ham* .......... $ 11,333 N/A N/A $ 24,208/(2)/
Peter D. Sacks ............... $ 16,500 N/A N/A $ 55,125/(3)/
Dr. Anton E. Schrafl ......... $ 14,000 N/A N/A $ 32,375/(2)/
E. Duff Scott ................ $ 16,000 N/A N/A $ 16,000/(1)/
John T. Sheehy ............... $ 16,000 N/A N/A $ 57,125/(3)/
Brian M. Sherman* ............ $ 0 N/A N/A $ 0/(3)/
Warren C. Smith .............. $ 15,000 N/A N/A $ 15,000/(1)/
Hugh Young* .................. $ 0 N/A N/A $ 0/(2)/
----------------------
++ Mr. Freedman is paid consulting fees by the Fund's Investment Manager
equal to the fees paid to the Fund's Independent Directors of funds of
which Mr. Freedman is a director in the fund complex. For the fiscal
year ended October 31, 2001, the amount of the consulting fees paid to
Mr. Freedman was an aggregate of $23,560 with respect to the two funds
of which Mr. Freedman is a director in the fund complex, of which
$11,870 was paid with respect to the Fund.
* Messrs. Gleeson-White and Sherman resigned from the Board of Directors
effective December 2000. Sir David Rowe-Ham resigned from the Board of
Directors effective August 1, 2002. Mr. Hugh Young resigned from the
Board of Directors effective September 12, 2002.
CODE OF ETHICS
The Fund, the Investment Manager and the Investment Adviser have
adopted a joint code of ethics ("Code of Ethics") in accordance with Rule 17j-1
under the 1940 Act. Subject to certain conditions and restrictions, the Code of
Ethics permits personnel who are subject to the Code of Ethics to invest in
securities, including securities that may be purchased or held by the Fund.
The Fund's Dealer Managers have also each adopted a code of ethics in
accordance with Rule 17j-1 under the 1940 Act. Subject to certain conditions and
restrictions, each of these codes of ethics permits
73
personnel who are subject to it to invest in securities, including securities
that may be purchased or held by the Fund.
Each of these codes of ethics may be reviewed and copied at the Public
Reference Room of the SEC in Washington, D.C. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090.
These codes of ethics are also available on the EDGAR Database on the SEC's
Internet site at http://www.sec.gov. Copies of these codes of ethics 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.
MANAGEMENT AGREEMENT AND ADVISORY AGREEMENT
Aberdeen Asset Managers (C.I.) Limited ("Investment Manager") serves as
investment manager to the Fund pursuant to a management agreement dated December
21, 2000 ("Management Agreement"). The Investment Manager is a Jersey, Channel
Islands corporation organized in October 1985. The registered office of the
Investment Manager is located at 17 Bond Street, St. Helier, Jersey JE4 5XB,
Channel Islands. Aberdeen Asset Management Limited ("Investment Adviser") serves
as investment adviser to the Fund pursuant to an advisory agreement dated
December 21, 2000 ("Advisory Agreement"). The Investment Adviser is a
wholly-owned subsidiary of Aberdeen Asset Management Holdings Limited ("AAMHL"),
an Australian corporation. The registered offices of the Investment Adviser and
AAMHL are located at Level 6, 201 Kent Street, Sydney, NSW 2000, Australia. Both
the Investment Manager and AAMHL are wholly-owned subsidiaries of Aberdeen Asset
Management PLC, a United Kingdom corporation. The registered offices of Aberdeen
Asset Management PLC are located on One Albyn Place, Aberdeen, Scotland AB10
1YG.
Pursuant to the existing and previous management agreements and
advisory agreements with the Fund, the Investment Manager and Investment Adviser
have served in these capacities since the Fund was organized in 1992. The
current Management Agreement and Advisory Agreement (collectively, "Agreements")
were approved by the Fund's Board of Directors, and separately by a majority of
the Fund's Independent Directors, at an in-person meeting held on October 10,
2000, and subsequently by the Fund's stockholders at a special meeting of
stockholders held on November 30, 2000. The approvals of the Agreements by the
Fund's Directors and stockholders occurred in connection with the acquisition of
the Investment Manager and the Investment Adviser ("Acquisition") by Aberdeen
Asset Management PLC ("Aberdeen"). The Agreements were executed upon the
effectiveness of the Acquisition. See "Management Agreement and Advisory
Agreement - Relationship of Certain Directors and Service Providers to
Investment Manager and Investment Adviser." The information considered by the
Fund's Directors, as well as by a specially appointed Due Diligence Committee of
Independent Directors, in connection with the Acquisition is discussed below
under "Management Agreement and Advisory Agreement - Considerations in Approving
Management Agreement and Advisory Agreement."
Each of the Investment Manager and the Investment Adviser has all, or a
substantial part of, its assets located outside the United States. As a result,
it may be difficult for U.S. investors to enforce judgments of the courts of the
United States against the Investment Manager and the Investment Adviser
predicated on the civil liability provisions of the Federal securities laws of
the United States. The Fund has been advised that there is substantial doubt as
to the enforceability in the courts of Australia of judgments against the
Investment Adviser predicated upon the civil liability provisions of the Federal
securities laws of the United States. The Fund also has been advised that it is
unlikely that the courts of Jersey would adjudge civil liability against the
Investment Manager in an original action predicated solely on the Federal
securities laws of the United States. However, although there is no arrangement
in place between Jersey and the United States for the reciprocal enforcement of
judgments, the Fund has been advised by Jersey counsel that a judgment rendered
by a court in the United States against the Investment
74
Manager predicated upon a violation of the Federal securities laws of the U.S.
would be enforceable by action or counterclaim or be recognized by the Jersey
courts as a defense to an action, or as conclusive of an issue in an action,
unless obtained by fraud or otherwise than in accordance with the principles of
natural justice or unless contrary to public policy or unless the proceedings in
the United States court were not duly served on the defendant in the original
action. The Investment Manager and the Investment Adviser are advised by U.S.
counsel with respect to the Federal securities laws of the United States.
Terms of the Management Agreement
The Management Agreement provides that the Investment Manager will
manage, in accordance with the Fund's stated investment objective, policies and
limitations and subject to the supervision of the Fund's Board of Directors, the
Fund's investments and make investment decisions on behalf of the Fund including
the selection of, and placing of orders with, brokers and dealers to execute
portfolio transactions on behalf of the Fund. The Management Agreement further
provides that the Investment Manager will not be liable for any error of
judgment or for any loss suffered by the Fund in connection with matters to
which the Management Agreement relates, except a loss resulting from a breach of
fiduciary duty with respect to receipt of compensation for services (in which
case any award of damages shall be limited as provided in the 1940 Act) or a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of, or from reckless disregard by the Investment Manager
of, its duties and obligations under the Management Agreement.
The Management Agreement provides that the Investment Manager may, at
its expense, employ, consult or associate with itself, such person or persons as
it believes necessary to assist it in carrying out its obligations thereunder,
provided, however, that if any such person would be an "investment adviser" (as
that term is defined under the 1940 Act) to the Fund, (a) the Fund is a party to
any contract with such a person and (b) the contract is approved by the Fund's
Directors, Independent Directors and stockholders, as required by the 1940 Act.
Management Fee. The Management Agreement provides that the Fund will
pay the Investment Manager a fee at the annual rate of 0.65% of the Fund's
average weekly net assets applicable to shares of Common Stock and Preferred
Stock up to $200 million, 0.60% of such amounts between $200 million and $500
million, and 0.55% of such assets in excess of $500 million, computed based upon
net asset value applicable to shares of Common Stock and Preferred Stock
determined weekly and payable on the first business day of each calendar month,
it being understood that the portion of the fee which is equal to the percentage
of the Fund's net assets, measured at the end of each week, held in securities
(or cash) denominated in the currencies of Australia and New Zealand, Canada,
and the United Kingdom shall be paid to the Investment Manager in, respectively,
the currencies of Australia, Canada, and the United Kingdom. Because of the
Fund's objective, its expense ratio, of which this fee is a component, may be
higher than that of closed-end investment companies of comparable size investing
in U.S. securities.
For the fiscal years ended October 31, 2001, 2000 and 1999, the Fund
paid or accrued on behalf of the Investment Manager aggregate management fees of
$807,872, $885,578, and $972,558, respectively. During the same periods, the
Investment Manager informed the Fund that it paid aggregate advisory fees of
$318,388, $339,225, and $362,448, respectively, to the Investment Adviser.
Payment of Expenses. The Management Agreement obligates the Investment
Manager to bear all expenses of its employees, except as provided in the
following sentence, and overhead incurred in connection with its duties under
the Management Agreement and to pay all salaries and fees of the Fund's
Directors and officers who are interested persons (as defined in the 1940 Act)
of the Investment Manager. The Fund will bear all of its own expenses,
including: expenses of organizing the Fund; fees of the Fund's Independent
Directors; out-of-pocket expenses for all Directors and officers of the Fund,
75
including expenses incurred by the Manager's employees, who serve as Directors
and officers of the Fund, which may be reimbursed by the Fund under the Fund's
policy governing reimbursement of Fund-related expenses, and other expenses
incurred by the Fund in connection with meetings of Directors and stockholders;
interest expense; taxes and governmental fees including any original issue taxes
or transfer taxes applicable to the sale or delivery of shares or certificates
therefor; brokerage commissions and other expenses incurred in acquiring or
disposing of the Fund's portfolio securities; expenses in connection with the
issuance, offering, distribution, sale or underwriting of securities issued by
the Fund; expenses of registering and qualifying the Fund's shares for sale with
the SEC and in various states and foreign jurisdictions; auditing, accounting,
insurance and legal costs; custodian, dividend disbursing and transfer agent
expenses; and the expenses of stockholders' meetings and of the preparation and
distribution of proxies and reports to stockholders.
Duration and Termination. The Management Agreement took effect on
December 21, 2000 and will continue in effect until December 21, 2002. The
Management Agreement provides that it will continue in effect for successive
12-month periods, if not sooner terminated, provided that each continuance is
specifically approved annually by (1) the vote of the majority of the Fund's
Independent Directors cast in person at a meeting called for the purpose of
voting on such approval and (2) either (a) the vote of a majority of the
outstanding voting securities of the Fund, or (b) the vote of a majority of the
Fund's Board of Directors. The Management Agreement may be terminated at any
time by the Fund without the payment of any penalty, upon vote of a majority of
the Fund's Directors or a majority of the outstanding voting securities of the
Fund on 60 days written notice to the Investment Manager. The Management
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act). In addition, the Investment Manager may terminate the
Management Agreement on 90 days written notice to the Fund.
Terms of the Advisory Agreement
The Advisory Agreement provides that the Investment Adviser will (i)
make recommendations to the Investment Manager as to the overall structure of
the Fund's portfolio, including asset allocation advice and general advice on
investment strategy relating to the Fund's overall investment objectives, and
(ii) make recommendations to the Investment Manager as to specific portfolio
securities to be purchased, retained or sold by the Fund and will provide or
obtain such research and statistical data as may be necessary in connection
therewith. The Advisory Agreement further provides that the Investment Adviser
will give the Investment Manager and the Fund the benefit of the Investment
Adviser's best judgment and efforts in rendering services under the Advisory
Agreement.
The Advisory Agreement provides that neither the Investment Manager nor
the Investment Adviser will be liable for any error of judgment or for any loss
suffered by the Fund in connection with matters to which the Advisory Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
receipt of compensation for services (in which case any award of damages shall
be limited as provided in the 1940 Act) or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Manager
or the Investment Adviser, as appropriate, in the performance of, or from
reckless disregard by such party of such party's obligations and duties under,
the Advisory Agreement.
Advisory Fee. For its recommendations to the Investment Manager as to
the overall structure of the Fund's portfolio, including asset allocation advice
and general advice on investment strategy relating to the Fund's overall
investment objectives, the Investment Manager pays the Investment Adviser a fee
at the annual rate of 0.15% of the Fund's average weekly net assets, computed
based upon net asset value applicable to shares of Common Stock and Preferred
Stock determined weekly and payable on the first business day of each calendar
month. For its recommendations to the Investment Manager as to specific
portfolio securities to be purchased, retained or sold by the Fund and any
research and statistical data as
76
may be necessary in connection therewith, the Investment Manager pays the
Investment Adviser a fee at the annual rate of up to 0.10% of the Fund's average
weekly net assets computed based upon net asset value applicable to shares of
Common Stock and Preferred Stock determined weekly and payable on the first
business day of each calendar month (offset by the amount, if any, that the
Investment Manager may pay other entities for specific securities
recommendations or research).
Payment of Expenses. The Advisory Agreement obligates the Investment
Adviser to bear all expenses of its employees, except certain expenses incurred
by the Investment Adviser's employees who serve as officers and directors of the
Fund which are reimbursed by the Fund under the Fund's policy governing
reimbursement of Fund-related expenses. The Advisory Agreement also obligates
the Investment Adviser to bear all overhead incurred in connection with its
duties under the Advisory Agreement and to pay all salaries and fees of the
Fund's Directors and officers who are interested persons (as defined in the 1940
Act) of the Investment Adviser but who are not interested persons of the
Investment Manager.
Duration and Termination. The Advisory Agreement took effect on
December 21, 2000 and will continue in effect until December 21, 2002. The
Advisory Agreement provides that it will continue in effect for successive
12-month periods, if not sooner terminated, provided that each continuance is
specifically approved annually by (1) the vote of the majority of the Fund's
Independent Directors cast in person at a meeting called for the purpose of
voting on such approval and (2) either (a) the vote of a majority of the
outstanding voting securities of the Fund, or (b) the vote of a majority of the
Fund's Board of Directors. The Advisory Agreement may be terminated with respect
to the Fund at any time by the Fund without the payment of any penalty, upon
vote of a majority of the Fund's Directors or a majority of the outstanding
voting securities of the Fund on 60 days written notice to the Investment
Manager and the Investment Adviser. The Advisory Agreement will terminate
automatically as to any party in the event of its assignment (as defined in the
1940 Act) by that party. In addition, the Investment Manager or the Investment
Adviser may terminate the Advisory Agreement as to such party on 90 days written
notice to the Fund and the other party.
Considerations in Approving Management Agreement and Advisory Agreement
In connection with the Acquisition by Aberdeen of the Investment
Manager (then known as EquitiLink International Management Limited ("EIML")) and
the Investment Adviser (then known as EquitiLink Australia Limited ("EAL")), the
Fund's Board of Directors, as well as a specially appointed Due Diligence
Committee consisting of Independent Directors ("Due Diligence Committee"),
extensively reviewed information regarding the proposed Acquisition and its
implications for the Fund and its ongoing management. The Due Diligence
Committee requested and reviewed extensive information regarding the Acquisition
and its potential impact on EIML and EAL and on the management of the Fund
subsequent to the Acquisition. Members of the Due Diligence Committee and Fund
counsel met with Aberdeen representatives on various occasions and further
discussion was conducted in the course of a video conference among the Due
Diligence Committee, Aberdeen representatives and Fund counsel. The results of
the Due Diligence Committee's investigations were presented in a report to the
Board. The report discussed a variety of issues that the Due Diligence Committee
had specifically reviewed regarding the Acquisition, including the terms of the
Acquisition; Aberdeen's experience with closed-end funds; its experience with
other acquired entities; Aberdeen's strategic plans and their consistency with
Aberdeen's intentions regarding the Fund (including the Fund's Preferred Stock);
Aberdeen's business, financial and performance history and current status; its
regulatory history; and its plans for continuing the quality of service being
provided to the Fund.
At its meeting on October 10, 2000, the Board reviewed the Due
Diligence Committee's report. It also received assurances from EIML and EAL that
the quality of service to the Fund would be
77
maintained subsequent to the Acquisition. The Board also noted that Aberdeen
would give the Fund access to increased expertise in Asian investments and to
the facilities of an international management organization. In their separate
deliberations with respect to continuing to retain EIML and EAL as investment
manager and investment adviser of the Fund, respectively, subsequent to the
Acquisition, the Fund's Independent Directors considered comparative data on
investment performance, advisory fees and other fees and expense ratios,
profitability and ancillary benefits to EIML, EAL and their affiliates from
their relationship to the Fund, financial resources of EIML and EAL before and
after the Acquisition, and the incentives to assure both continuity of
management and quality of service to the Fund subsequent to the Acquisition.
They also noted that the Acquisition arrangements and applicable legal
requirements provided assurances that Fund fees and expenses would not be
increased. In determining to approve the Agreements to take effect subsequent to
the Acquisition, the Board noted that Aberdeen had built its own business
internally, as well as through acquisition, and that the Acquisition was
consistent with Aberdeen's strategic plans. The Board also reviewed information
indicating the seriousness of Aberdeen's support for the Fund, its experience
with closed-end funds, and the consistency of its investment philosophy with
that of EIML and EAL. The Board was informed that the Acquisition would be
conducted in reliance on Section 15(f) under the 1940 Act. Among other things,
this legal provision would require that for at least three years subsequent to
the Acquisition, at least 75% of the Fund's directors not be persons affiliated
with the Fund's previous or current management, and that no "unfair burden" be
placed on the Fund for two years following the Acquisition. Based on their
review and evaluation of the information presented by the Due Diligence
Committee and at the meeting, the Fund's Independent Directors determined that
the Acquisition would cause no reduction in the quality of services to be
provided to the Fund and that it might provide certain benefits to the Fund. The
Agreements were therefore approved by the Independent Directors as well as by
the full Board.
Experience of the Investment Manager and Investment Adviser
General. The Fund's Investment Manager is Aberdeen Asset Managers
(C.I.) Limited, an investment management company organized in Jersey, Channel
Islands. The Investment Manager manages, in accordance with the Fund's stated
investment objective, policies and limitations and subject to the supervision of
the Fund's Board of Directors, the Fund's investments and makes investment
decisions on behalf of the Fund, including the selection of, and placing of
orders with, broker-dealers to execute portfolio transactions on behalf of the
Fund and the making of investments in U.S. dollar-denominated securities. The
Investment Manager's affiliate, Aberdeen Asset Management Limited, an Australian
corporation, acts as the Fund's Investment Adviser, makes recommendations to the
Investment Manager as to specific portfolio securities to be purchased, retained
or sold by the Fund, and providing or obtaining such research and statistical
data as may be necessary in connection therewith. The Investment Manager and the
Investment Adviser also serve in these capacities for Aberdeen Asia-Pacific
Income Fund, Inc., a non-diversified closed-end management investment company,
the shares of which are listed on the AMEX and the PSE, investing primarily in
debt securities of issuers in Australia, New Zealand and Asian countries, which
commenced operations in 1986; Aberdeen Asia-Pacific Income Investment Company
Limited, a closed-end management investment company, the shares of which are
listed on the TSX, also investing primarily in Australian and Asian debt
securities, which commenced operations in 1986; The First Asia Income Fund, a
closed-end unit trust the units of which are listed on the TSX, investing
primarily in debt securities of issuers in Australia, New Zealand and Asian
countries, which commenced operations in 1997; and Aberdeen Australia Equity
Fund, Inc., a non-diversified closed-end management investment company, the
shares of which are listed on the AMEX and the PSE, investing primarily in
Australian listed equity securities, which commenced operations in 1985. The
Investment Manager also manages Aberdeen Scots Trust and Aberdeen G(7) Trust,
each of which is a Canadian unit investment trust. The Investment Manager and
the Investment Adviser are registered with the SEC under the Investment Advisers
Act of 1940, as amended.
78
The Investment Manager and Investment Adviser, together with other
affiliates of Aberdeen Asset Management PLC (collectively, the "Aberdeen
Group"), form a globally diversified management firm. The Investment Manager and
the Investment Adviser are parties to a memorandum of understanding ("MOU") with
three affiliated Aberdeen organizations: Aberdeen Asset Management Asia Limited
("Aberdeen Singapore"), Aberdeen Asset Managers Limited ("Aberdeen UK") and
[name of Aberdeen Thailand entity] ("Aberdeen Thailand"). Pursuant to the MOU,
the Investment Manager and the Investment Adviser have retained the services of
investment professionals from Aberdeen Singapore, Aberdeen UK and Aberdeen
Thailand to provide portfolio management and/or trading services to the Fund, as
well as other U.S. funds managed by the Investment Manager and the Investment
Adviser. Pursuant to the MOU, Aberdeen Singapore, Aberdeen UK and Aberdeen
Thailand are Participating Affiliates of the Investment Manager and the
Investment Adviser as that term is used in relief granted by the staff of the
SEC allowing U.S. registered advisers to use portfolio management and trading
resources of unregistered advisory affiliates subject to the control and
supervision of a registered adviser. The MOU also designates certain advisory
personnel of the Participating Affiliates as Aberdeen Affiliate Associated
Persons for purposes of supervision and control.
As of the date of this prospectus, the Aberdeen Group had approximately
US $___ billion in assets under management. Aberdeen Singapore is one of the
largest dedicated managers/advisers on Asian bonds globally, with approximately
US $___ billion of such assets under management as of the date of this
prospectus. In Australia, the Aberdeen Group manages several Australian
institutional domestic bond mandates, in addition to advising the Fund and other
listed closed-end funds.
As noted above, both the investment Manger and the Investment Adviser
are affiliates of Aberdeen asset Management PLC ("Aberdeen"), which is subject
to regulation by the Financial Services Authority ("FSA") in the United Kingdom.
Beginning in December 2001, the FSA commenced a series of fact-finding exercises
in order to examine the split capital closed-end fund ("SCCEF") market. In May
2002, the FSA indicated it was continuing to study the SCCEF market. Aberdeen,
through affiliates, manages or advises 19 of 134 SCCEFs listed in the united
Kingdom, which as of August 31, 2002, represented 6.45% of the Aberdeen Group's
funds under management. Aberdeen is cooperating with the fact finding exercise
being conducted by the FSA. Aberdeen Unit Trust Managers Limited, an affiliate
of the Investment Manager and the Investment Adviser, manages Aberdeen
Progressive Growth Unit Trust, an authorized unit trust (i.e. mutual fund) which
invests primarily in zero dividend preference shares, a class of shares issued
by SCCEPs. In June 2002, Aberdeen informed investors in that fund that it was
Aberdeen's intention to present to them a capital restoration plan. Details of
this proposal continue to be under consideration, and are subject to formal
approval by Aberdeen's Board of Directors and shareholders. The Investment
Manager and the Investment Adviser do not believe that either of these matters
will impact their ability to continue to perform their services under their
respective agreements with the Fund.
Portfolio Management
The Investment Adviser provides the overall investment advice to the
Fund, on matters including broad investment structure, compliance testing, and
maintenance of tests pertaining to collateral, through a team of investment
managers/analysts employed, or supervised, by the Investment Adviser. Members of
the Investment Adviser's team based in Sydney, Australia provide investment
research and analysis with respect to the Australian and New Zealand components
of the Fund's portfolio. Input on interest rate strategy is also provided by a
team of investment professionals from Aberdeen UK, who also develop the Aberdeen
outlook for U.S. Treasuries. Investment research and analysis for the Asian
component of the Fund's portfolio is provided by a team of investment
managers/analysts employed by Aberdeen Singapore, with further analysis
regarding Thai domestic corporate bonds provided by investment managers/analysts
employed by Aberdeen Thailand. The equity analysts of Aberdeen Singapore also
provide expertise regarding regional corporate and bank issues.
The various teams meet individually, and confer with each other,
regularly to analyze economic, political and credit events, as well as
developments in the bond, currency, and various related markets. Members of the
Sydney team, together with members of the Singapore team, discuss and set the
relative weightings of the Fund's Australian, Asian and New Zealand securities.
Relationship of Certain Directors and Service Providers to Investment Manager
and Investment Adviser
Mr. Martin Gilbert, a Director of the Fund, also serves as a director
of the Investment Manager and the Investment Adviser and as the Chief Executive
and an Executive Director of Aberdeen Asset Management PLC ("Aberdeen"), the
parent company of the Investment Manager and Investment Adviser. Mr. Gilbert is
also a shareholder of Aberdeen.
In connection with the Acquisition of the Investment Manager and
Investment Adviser by Aberdeen, all of the shares of the Investment Manager, of
the parent of the Investment Adviser, and of EquitiLink International (Channel
Islands) Limited ("EICIL") were transferred to Aberdeen, pursuant to a Share
Sale Agreement between (i) Aberdeen on the one side, and (ii) entities of which
Mr. Laurence S. Freedman, a Director and former President of the Fund, and Mr.
Brian M. Sherman, the former Chairman of the Fund, are the principal
shareholders, and the shareholders of EICIL, on the other side. Total
consideration for the sale was US$80 million, subject to certain adjustments.
The consideration was paid in a combination of cash and preference shares issued
by Aberdeen. At the time of the execution of the Share Sale Agreement, Messrs.
Freedman and Sherman were directors and the principal shareholders of the
Investment Manager, and also served as, respectively, Joint Managing Director,
and Joint Managing Director and Chairman, of the Investment Adviser. In
connection with this sale, Messrs. Freedman and Sherman resigned as Joint
Managing Directors of the Investment Adviser and as directors of the Investment
Manager.
In 2001, entities of which Messrs. Freedman and Sherman are the
principal shareholders sold (i) 275,000 shares of the Fund's Common Stock to
Real Estate Opportunities Fund, a Jersey (C.I.) split capital investment trust
managed by an affiliate of the Fund's Investment Manager and Investment Adviser,
for $2,447,500, and (ii) 130,897 shares of the Fund's Common Stock to American
Monthly Income Trust Limited, a Jersey (C.I.) split capital investment trust
managed by an affiliate of the Fund's Investment Manager and Investment Adviser,
for $1,164,983. Because Messrs. Freedman and Sherman were both considered
"affiliates" of the Fund at the time the above share transfers were made, the
405,897 shares of the Fund's Common Stock discussed above are considered
"restricted shares" which can be publicly sold by their current owners only if
registered under the 1933 Act, or pursuant to an exemption from registration,
including pursuant to the exemption for limited resales provided by Rule
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144 promulgated thereunder. However, any Shares purchased by the Real Estate
Opportunities Fund or the American Monthly Income Trust Limited as part of the
Offer will not be considered restricted shares.
In general, under Rule 144, as currently in effect, an "affiliate" of
the Fund is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the then outstanding shares of Common
Stock or the average weekly reported trading volume of the Common Stock during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain restrictions on the manner of sale, to notice requirements
and to the availability of current public information about the Fund. In
addition, any profit resulting from an affiliate's sale of shares within a
period of less than six months from the purchases may have to be returned to the
Fund.
Effective as of March 1, 2000, EquitiLink USA. Inc. ("EUSA"), a
wholly-owned subsidiary of the Investment Manager, located at 45 Broadway, New
York, New York 10006, entered into an agreement to provide investor relations
services to the Fund ("Investor Relations Services Agreement"). Investor
relations services generally include (i) drafting, coordinating and distributing
press releases, monthly performance reviews, quarterly reports and letters to
shareholders on special issues; (ii) responding to shareholder letters and
requests for information; (iii) managing shareholder and broker toll-free
telephone services and mailing lists for the Fund; (iv) arranging and
coordinating communication between analysts and/or brokers and Fund management,
as well as, media interviews for Fund management with print, broadcast and
electronic reporters to discuss the Fund and the markets in which it invests;
and (v) providing quarterly reports to the Fund's Board of Directors on recent
investor relations activities.
Effective January 1, 2002, the rights of EUSA under the Investor
Relations Services Agreement were assigned to, and the obligations of EUSA
thereunder were assumed by, Aberdeen Fund Managers, Inc., an affiliate of the
Investment Manager and Investment Adviser, located at Las Olas Place, 300 South
East 2nd Street, Suite 820, Fort Lauderdale, Florida 33301. Aberdeen Fund
Managers, Inc., doing business as Aberdeen Asset Management Investor Relations
has retained the employees of EUSA, and provides services under the Investor
Relations Services Agreement, at 45 Broadway, New York, New York 10006. The
Board of Directors of the Fund, and the Independent Directors voting separately,
approved this assignment and assumption. For its services under the terms of the
Investor Relations Services Agreement, Aberdeen Asset Management Investor
Relations receives a monthly retainer of $4,000, plus reimbursement of
reasonable out-of-pocket expenses.
ADMINISTRATION AGREEMENT
The Administrator of the Fund is Princeton Administrators, L.P., a
Delaware limited partnership and an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. The principal address of the Administrator is 800 Scudders
Mill Road, Plainsboro, New Jersey 08536. Pursuant to the Administration
Agreement dated February 20, 1992, between the Administrator and the Fund
("Administration Agreement"), the Administrator provides, or arranges for the
provision of, various administrative services (i.e., services other than
investment advice and related portfolio activities) including: (i) maintaining
and keeping separate books and records for investment activities conducted in
(a) United Kingdom Pounds Sterling, (b) Canadian dollars, and (c) Australian
dollars (including investment activities conducted in New Zealand dollars); (ii)
preparing and, subject to approval by the Fund, filing reports and other
documents required by U.S. Federal, state and other applicable U.S. laws and
regulations and by U.S. stock exchanges on which Fund shares are listed,
including proxy materials and periodic reports to Fund stockholders, and
preparing or arranging for preparation of the initial draft of Federal, state
and local tax returns; (iii) coordinating tax related matters; (iv) responding
to or referring to the Fund's officers or its transfer agent inquiries from Fund
stockholders; (v) calculating in accordance with the Fund's policy as adopted
from time to time by the Board of Directors and publishing, or arranging for the
publication of,
80
the net asset value of the Fund's shares; (vi) overseeing, and, as the Board may
reasonably request or deem appropriate, making reports and recommendations to
the Board on, the performance of administrative and professional services
rendered to the Fund by others, including its custodian and any sub-custodian,
registrar, transfer agent, dividend disbursing agent and dividend reinvestment
plan agent, as well as accounting, auditing and other services; (vii) providing
the Fund with the services of persons competent to perform the foregoing
administrative and clerical functions; (viii) providing the Fund with
administrative offices and data processing facilities; (ix) arranging for
payment of the Fund's expenses; (x) consulting with the Fund's officers,
independent accountants, legal counsel, custodian and any sub-custodian,
registrar, transfer agent and dividend disbursing agent and dividend
reinvestment plan agent in establishing the accounting policies of the Fund;
(xi) preparing such financial information and reports as may be required by any
banks from which the Fund borrows funds; (xii) providing such assistance to the
Investment Manager, the Investment Adviser, the custodian and any sub-custodian,
and the Fund's counsel and auditors as generally may be required to carry on
properly the business and operations of the Fund; and (xiii) preparing reports
related to the Fund's Preferred Stock as required by rating agencies.
For these services, the Fund pays the Administrator on the first
business day of each calendar month a fee for the previous month equal to the
greater of (i) $150,000 per annum ($12,500 per month), or (ii) at an annual rate
equal to 0.20% of the Fund's average weekly net assets computed based upon the
net asset values applicable to shares of Common Stock and shares of Preferred
Stock at the end of each week.
CONSULTING AGREEMENT
Pursuant to a Consulting Agreement between the Investment Manager and
CIBC World Markets, Inc. ("CIBCWM"), CIBCWM will, at the request of the
Investment Manager, provide advice relating to broad economic factors and trends
in the Canadian economy including yield curve and currency measurements with
respect to fixed-income securities denominated in Canadian dollars. CIBCWM will
provide the Investment Manager access to economic, financial markets and
corporate bond reports. The Investment Manager pays CIBCWM a monthly fee of
$1,000. During the fiscal years ended October 31, 2001, 2000 and 1999, the Fund
paid CIBCWM $12,000, $12,000 and $2,090, respectively. The agreement may be
terminated by either party upon 30 days written notice. CIBCWM's principal
address is 161 Bay Street, BCE Place, Canada Trust Tower, P.O. Box 500, Toronto,
Ontario, M5J 2S8, Canada.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Portfolio transactions of the Fund are primarily effected with dealers
acting as a principal for their own account. During the fiscal years ended
October 31, 2001, 2000 and 1999, the Fund paid no brokerage commissions.
The primary objective in placing orders for the purchase and sale of
securities for the Fund's portfolio is to obtain best execution taking into
account such factors as price, commission (if any), size of order, difficulty of
execution and skill required of the broker. In selecting broker-dealers to
execute the securities transactions, consideration will be given to such factors
as the price of security, the rate of the commission, the size and difficulty of
the order, the reliability, integrity, financial condition, general execution
and operational capabilities of competing broker-dealers, and the brokerage and
research services which they provide to the Fund.
Purchases and sales of fixed-income securities will usually be
principal transactions. Such portfolio securities normally will be purchased or
sold from or to issuers directly or to dealers serving as market makers for the
securities at a net price. Generally, transactions in fixed-income securities do
not involve brokerage commissions. The cost of executing the Fund's portfolio
securities transactions will
81
consist primarily of dealer spreads and underwriting commissions. The Fund will
not engage in transactions with any affiliated person in which such person acts
as principal, except as may be permitted by rule or order of exemption under the
1940 Act.
The Fund has authorized the Investment Adviser to pay higher
commissions in recognition of brokerage services which, in the opinion of the
Investment Manager, are necessary for the achievement of better execution,
provided the Investment Manager believes this to be in the best interest of the
Fund. Subject to best execution, orders may be placed with brokers who supply
research, market and statistical information ("research") to the Fund, the
Investment Manager and the Investment Adviser. The research may be used by the
Investment Manager and the Investment Adviser in advising other clients, and the
Fund's commissions to brokers supplying research may not represent the lowest
obtainable commission rates. Although research from brokers supplying research
may be useful to the Investment Manager and the Investment Adviser, it will be
only supplementary to their own efforts.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the Investment Manager. If purchase or
sale of securities consistent with the investment policies of the Fund and one
or more of these other clients served by the Investment Manager is considered at
or about the same time, transactions in such securities will be allocated among
the Fund and clients in a manner deemed fair and reasonable by the Investment
Manager. In making these allocations, the main factors to be considered will be
the respective investment objectives of the Fund and other clients, the relative
size of the portfolio holdings of the same or comparable securities, the
availability cash for investment by the Fund and other clients, the size of
investment commitments the Fund and other clients generally hold, and opinions
of the persons responsible for recommending investments to the Fund and other
clients.
NET ASSET VALUE OF COMMON STOCK
The Common Stock is listed on the NYSE. The NAV per share of Common
Stock is generally determined each day during which the NYSE is open for trading
and each other day that the calculation of the NAV is required for regulatory
purposes ("Valuation Date"). The NAV per share is calculated by dividing the
value of net assets of the Fund (the value of its assets less its liabilities,
its accumulated and unpaid dividends (whether or not earned or declared) on
outstanding shares of Preferred Stock and the aggregate liquidation value of
such outstanding shares of Preferred Stock) by the total number of shares of
Common Stock outstanding.
The Board of Directors has approved procedures ("Pricing and Valuation
Procedures") to value the Fund's securities in order to determine the NAV. The
value of a security traded or dealt in upon any recognized securities exchange
for that security (and that is not subject to restrictions against sale by the
Fund on such exchanges) is to be determined as of the Valuation Date as the last
quoted sale price as of the Valuation Date, on the principal exchange (if sold
on the principal exchange on the Valuation Date) or on another recognized
exchange (if not sold on the principal exchange but sold on such other exchange
on the Valuation Date). If no sale occurred on the Valuation Date, the security
is to be valued at bid price unless there is no current bid in which case the
security is to be valued at the mean between the closing bid price and asked
price, provided that the spread between the bid price and the asked price is
determined to be reasonable. Securities not traded or dealt in upon any
recognized exchange, for which OTC market quotations are readily available, are
valued at the mean between the closing bid price and asked price, provided that
the spread between the bid and asked price is determined to be reasonable.
Securities and other assets for which market prices are not readily available
are valued at fair value, as determined by, or pursuant to, the Pricing and
Valuation Procedures.
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The Pricing and Valuation Procedures provide that the aggregate value
of all foreign securities denominated in foreign currencies shall be
incorporated in the aggregate value of the respective currency portfolio and
converted into U.S. dollars according to the procedures normally employed by the
Administrator in calculating the Fund's NAV.
Shares of closed-end investment companies frequently trade at a
discount from NAV, but in certain instances have traded above NAV. The Fund's
shares have traded in the market below, at or above NAV since the commencement
of the Fund's operations. The Fund cannot predict whether its shares will trade
above or below NAV in the future.
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
It is the Fund's present policy, which may be changed by the Board of
Directors, to provide investors with a stable monthly distribution of U.S. 6
cents per month out of current income, supplemented by realized capital gains
and, to the extent necessary, paid-in-capital; although there can be no
assurance that the Fund will continue to be able to do so. See "Risk Factors and
Special Considerations - Current Distribution Rate." Under United States tax
accounting rules, the amount of distributable income for each fiscal period
depends on the actual exchange rates during the entire year between the U.S.
dollar and the currencies in which Fund assets are denominated and on the
aggregate gains and losses realized by the Fund during the entire year.
Therefore, the exact amount of distributable income for each fiscal year can
only be determined as of the end of the Fund's fiscal year, October 31st. See
"Taxation - United States Taxes."
The Fund distributes to stockholders, at least annually, substantially
all of its net investment income and net realized capital gains. Shares
purchased pursuant to the Offer will be issued after the record date for the
monthly distribution payable in [month year], and accordingly, the Fund will not
pay such monthly distribution with respect to such Shares.
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan
("Plan"), investors whose shares are registered in their names shall be deemed
to have elected, unless [______] ("Plan Agent") is otherwise instructed in
writing, to have all distributions of dividends and capital gains, net of any
applicable withholding tax, automatically reinvested in additional shares of the
Fund's Common Stock by the Plan Agent. Stockholders who do not participate in
the Plan will receive all distributions in cash paid by check mailed directly to
the Stockholder. A Stockholder whose shares are registered in the name of a
broker-dealer or other nominee ("nominee") will be a Plan participant if such a
service is provided by the nominee and the nominee makes an election on behalf
of the Stockholder to participate in the Plan. A Stockholder whose shares are
held by a broker or nominee that does not provide a dividend reinvestment
program may be required to have his shares registered in his own name to
participate in the Plan. The Plan Agent will act as agent for Plan participants
and will open an account under the Plan for each Plan participant in the same
name as such Plan participant's Common Stock is registered on the books and
records of the transfer agent for the Common Stock.
Participants in the Plan have the option of making additional cash
investments in Fund shares through the Plan Agent. The Plan Agent will purchase
Fund shares for Plan Participants on the NYSE or on the open market. A minimum
investment of at least $100 is required by the terms of the Plan.
The Plan Agent serves as agent for the Stockholders in administering
the Plan. If the Directors of the Fund declare an income dividend or a capital
gains distribution payable in cash only to Stockholders who are not Plan
participants or in cash to such non-participants who do not affirmatively elect
to take shares, non-participants in the Plan will receive cash and participants
in the Plan will receive Common
83
Stock. The shares will be acquired by the Plan Agent for the participant's
account, depending upon the circumstances described below either (i) through
receipt of additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by the purchase of outstanding shares of
Common Stock on the open market ("open market purchases") on the NYSE or
elsewhere.
If the market price of the Fund's Common Stock plus any applicable
brokerage commissions is equal to or exceeds the net asset value per share on
the applicable valuation date for the purpose of determining the number of
shares equivalent to the cash dividend or capital gain distribution, Plan
participants will be issued shares of Common Stock valued at the greater of the
net asset value per share, or 95% of the then current market price. Plan
participants will receive their capital gain distribution or dividend entirely
in shares of Common Stock, and the Plan Agent will automatically receive the
shares of Common Stock, including fractions, for all Plan participants'
accounts.
If the net asset value per share of the Common Stock plus any
applicable brokerage commissions on the applicable valuation date exceeds the
market price of the Common Stock at such time, the Plan Agent will, as
purchasing agent for the Plan participants, buy shares of Common Stock in the
open-market, on the NYSE or elsewhere, for each Plan participant's account
during the purchase period described below. If, before the Plan Agent has
completed its purchases, the market price plus any applicable brokerage
commission exceeds the net asset value per share, as last determined, the Plan
Agent shall suspend making open-market purchases and shall invest the balance
available in newly issued shares valued at the greater of net asset value per
share as last so determined or 95% of the then current market value. In any case
in which the Plan Agent is unable to invest the full dividend amount in
open-market purchases during the purchase period, the Plan Agent will invest the
balance available in newly issued shares of Common Stock valued at the greater
of the net asset value per share or 95% of the current market value as
determined on the last business day during the purchase period. The Plan Agent
will apply all cash received as a dividend or capital gain distribution to
purchase shares of Common Stock in the open-market or from the Fund as soon as
practicable after the payment date of the dividend or capital gain distribution,
but in no event later than 30 days after such date, except where necessary to
comply with applicable provisions of the Federal securities laws.
Any shares issued by the Fund will be issued at a discount of not more
than 5% from the then current market price. Because of differences and changes
in net asset value and market price of the Common Stock, a Stockholder may
receive shares at prices other than the net asset value on the applicable
valuation date. The average per share purchase price paid by the Plan Agent may
exceed the net asset value of the Fund's shares on the applicable valuation
date, resulting in the acquisition of fewer shares than if the dividend had been
paid in newly issued shares on the applicable valuation payment date.
In cases when the Directors of the Fund declare an income dividend or a
capital gains distribution payable in shares only to Stockholders who are not
Plan participants or in shares to such non-participants who do not affirmatively
elect to take cash, both non-participants in the Plan as well as Plan
participants will receive newly issued shares on identical terms and conditions
as established by the Fund's Board of Directors.
The Plan Agent maintains all Stockholder accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information for Stockholders' personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each Stockholder's proxy will include those
shares purchased pursuant to the Plan.
In the case of Stockholders, such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of
84
shares certified from time to time by the Stockholders as representing the total
amount registered in the Stockholder's name and held for the accounts of
beneficial owners who are to participate in the Plan.
There is no direct charge to Plan participants for reinvesting
dividends or capital gains distributions. The Plan Agent's fees for the handling
of reinvestment of dividends and distributions will be paid by the Fund. There
will be no brokerage charges with respect to shares issued directly by the Fund.
Whenever shares are purchased on the NYSE or otherwise in the open market, each
Plan participant will pay a pro rata share of brokerage commissions. A nominal
fee may be charged by the Plan Agent upon any cash withdrawal or termination.
The automatic reinvestment of dividends and distributions will not
relieve Plan participants of any income tax that may be payable on such
dividends or distributions.
Any Plan participant may withdraw shares from the Plan participant's
account or terminate the Plan participant's account under the Plan by notifying
the Plan Agent in writing or pursuant to telephone procedures established by the
Plan. The withdrawal or termination will be effective immediately if notice is
received by the Plan Agent not less than 10 days prior to any dividend or
capital gain distribution record date; otherwise, the withdrawal or termination
will be effective with respect to any subsequent dividend or capital gain
distribution on the first trading day after the dividends paid for such record
date have been credited to the Plan participant's account. The Plan may be
terminated by the Plan Agent or the Fund upon notice in writing mailed to each
Plan participant at least 90 days prior to any record date for the payment of
any dividend or capital gain distribution by the Fund. The terms and conditions
of the Plan may be amended or supplemented by the Plan Agent or the Fund at any
time or times, but only by mailing to each Plan participant appropriate written
notice at least 90 days prior to the effective date, except when necessary or
appropriate to comply with applicable law or the rules or policies of the SEC or
any other regulatory authority.
All correspondence concerning the Plan should be directed to the Plan
Agent at [name] [address], Attention: Dividend Reinvestment Department.
TAXATION
The following is intended to be a general summary of certain tax
consequences that may result to the Fund and its stockholders. It is not
intended as a complete discussion of all such tax consequences, nor does it
purport to deal with all categories of investors. Investors are therefore
advised to consult with their tax advisers before making an investment in the
Fund. The summary is based on the laws in effect on the date of this Prospectus,
which are subject to change.
United States Taxes
Tax Treatment of the Fund - General. The Fund intends to continue to
qualify annually to be treated as a regulated investment company under the Code.
To qualify as a regulated investment company, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in such stock,
securities or currencies ("Qualifying Income Requirement"); (b) diversify its
holdings so that, at the end of each quarter of the taxable year (i) at least
50% of the market value of the Fund's assets is represented by cash and cash
items, U.S. government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for purposes of this calculation to an
85
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies); and (c) distribute at least 90% of its investment company
taxable income (which includes, among other items, dividends, interest, and net
short-term capital gains in excess of net long-term capital losses) each taxable
year. The U.S. Treasury Department has authority to promulgate regulations
pursuant to which gains from foreign currency (and options, futures and forward
contracts on foreign currency) not directly related to a regulated investment
company's business of investing in stocks and securities would not be treated as
qualifying income for purposes of the Qualifying Income Requirement. To date,
such regulations have not been promulgated.
As a regulated investment company, the Fund generally will not be
subject to U.S. Federal income tax on its investment company taxable income and
net capital gains (net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years), if any,
that it distributes to stockholders. However, the Fund would be subject to
corporate income tax (currently at a 35% rate) on any undistributed income. The
Fund intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a non-deductible 4% excise tax. To prevent imposition
of the tax, the Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the 12-month period ending on October 31st of the calendar year, and
(3) all such ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as having been
paid on December 31st if it is declared by the Fund in October, November or
December with a record date in such month and is paid by the Fund in January of
the following year. Accordingly, such distributions will be taxable to
stockholders in the calendar year in which the distributions are declared. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement. The
Fund may distribute net capital gains at least annually and designate them as
capital gain dividends where appropriate, or, alternatively, the Fund may choose
to retain net capital gains and pay corporate income tax (and, possibly, an
excise tax) thereon. In the event that the Fund retains net capital gains, the
Fund would most likely make an election which would require each stockholder of
record on the last day of the Fund's taxable year to include in gross income for
U.S. Federal tax purposes his or her proportionate share of the Fund's
undistributed net capital gain. If such an election were made, each stockholder
would be entitled to credit his or her proportionate share of the tax paid by
the Fund against his or her Federal income tax liabilities and to claim a refund
to the extent that the credit exceeds such liabilities. Tax-qualified pension
plans and individual retirement accounts ("IRAs") (through their custodian or
trustee), as well as nonresident aliens and foreign corporations, can obtain a
refund of their proportionate shares of the tax paid by the Fund by filing a
U.S. Federal income tax return. In addition, the stockholder would be entitled
to increase the basis of the shares for U.S. Federal tax purposes by an amount
equal to 65% of his or her proportionate share of the undistributed net capital
gain.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Code, the Fund would be taxed in the same manner as
an ordinary corporation and distributions to its stockholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to stockholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the stockholders' hands
as long-term capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it must pay out its earnings and
86
profits accumulated in that year and may be required to recognize any net
unrealized gains on its entire portfolio in order to requalify as a regulated
investment company.
Distributions. For Federal income tax purposes, dividends paid by the
Fund out of its investment company taxable income will be taxable to a U.S.
stockholder as ordinary income. Because none of the Fund's income is expected to
consist of dividends paid by U.S. corporations, none of the dividends paid by
the Fund is expected to be eligible for the corporate dividends-received
deduction. To the extent that the Fund designates distributions of net capital
gains as capital gain dividends, such distributions will be taxable to a
stockholder as long-term gain, regardless of how long the stockholder has held
the Fund's shares, and are not eligible for the dividends-received deduction.
Distributions in excess of the Fund's investment company taxable income and net
capital gains will first reduce a stockholder's basis in his shares and, after
the stockholder's basis is reduced to zero, will constitute capital gains to a
stockholder who holds his shares as capital assets.
Stockholders participating in the Plan receiving a distribution in the
form of newly-issued shares will be treated for U.S. Federal income tax purposes
as receiving a distribution in an amount equal to the fair market value,
determined as of the distribution date, of the shares received and will have a
cost basis in each share received equal to the fair market value of a share of
the Fund on the distribution date. Stockholders participating in the Plan
receiving a distribution in the form of shares purchased by the Plan Agent in
the open market will be treated for U.S. Federal income tax purposes as
receiving a distribution of the cash that such stockholder would have received
had it not elected to have such distribution reinvested and will have a cost
basis in such shares equal to the amount of such distribution. Stockholders will
be notified annually as to the U.S. Federal tax status of distributions, and
stockholders receiving distributions in the form of newly-issued shares will
receive a report as to the fair market value of the shares received.
The Fund presently intends that it will designate as capital gain
dividends a proportionate part of the dividends paid to holders of Preferred and
Common Stock.
Under United States tax accounting rules, the amount of distributable
income for each fiscal period depends on the actual exchange rates during the
entire year between the U.S. dollar and the currencies in which Fund assets are
denominated and on the aggregate gains and losses realized by the Fund during
the entire year. Therefore, the exact amount of distributable income for each
fiscal year can only be determined as of the end of the Fund's fiscal year,
October 31st.
Sale of Shares. Upon the sale or other disposition of shares of the
Fund, or upon receipt of a distribution in complete liquidation of the Fund, a
stockholder may realize a taxable gain or loss depending upon his basis in the
shares. The gain or loss generally will be treated as capital gain or loss if
the shares are capital assets in the stockholder's hands and generally will be
long-term or short-term gain, depending upon the stockholder's holding period
for the shares. Any loss realized on a sale or exchange will be disallowed to
the extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
that case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a stockholder on a disposition of Fund
shares held by the stockholder for six months or less will be treated as
long-term capital loss to the extent of any distributions of capital gain
dividends received by the stockholder with respect to the shares.
Issuance of Preferred Stock. The Internal Revenue Service has in a
revenue ruling taken the position that a regulated investment company which has
two or more classes of shares cannot effectively designate distributions made to
each class in any year, as consisting of more than that class's proportionate
share of particular types of income including capital gain and foreign source
income. When
87
both Common Stock and Preferred Stock are outstanding, the Fund intends to
designate distributions made to each class as consisting of particular types of
income in accordance with the class's proportionate shares of such income. Thus,
the Fund intends to designate as capital gain dividends a proportionate part of
the dividends paid to holders of Preferred and Common Stock. Also, if the Fund
is eligible to and does elect to pass foreign taxes through to its stockholders,
the Fund intends to designate dividends paid to each class of stockholders as
consisting of a proportionate share of the foreign taxes paid by the Fund.
If the Fund does not meet its asset maintenance requirements (See
"Capital Stock - Asset Coverage"), it may be required to suspend distributions
to the holders of its Common and/or Preferred Stock until such coverage is
restored. Suspension of distributions might prevent the Fund from qualifying as
a regulated investment company for Federal income tax purposes, or, if the Fund
retains such qualification, would cause the Fund to incur income and excise
taxes on its undistributed income. Further, the Fund may be required to redeem
Preferred Stock in order to restore asset coverage to an acceptable level. In
order to effect these redemptions, the Fund may be required to dispose of assets
for cash, and this may result in recognition of gain or loss to the Fund for tax
purposes. This gain or loss (or gain or loss from the remittance to the United
States of proceeds from the disposition of assets) may be treated, in whole or
in part for Federal income tax purposes, as gain or loss due to fluctuations in
foreign currency values, which under current law is ordinary rather than capital
in character. Ordinary gain or loss will increase, decrease, or possibly
eliminate the Fund's investment company taxable income distributable to holders
of Common Stock. For example, if losses attributable to foreign currency
fluctuations exceed other investment company taxable income during a taxable
year, the Fund would not be able to make ordinary income dividend distributions,
and all or a portion of distributions made would be treated as a return of
capital to stockholders for Federal income tax purposes, rather than as an
ordinary income dividend, reducing each stockholder's tax basis in his Fund
shares. Conversely, gain (including gain attributable to foreign currency
fluctuations) arising from the sale of Fund assets to redeem Preferred Stock
would increase the amounts required to be distributed to holders of Common Stock
in order for the Fund to retain its qualification as a regulated investment
company and/or to avoid imposition of income or excise taxes on the Fund.
Currency Fluctuations - "Section 988" Gains or Losses. Under the Code,
the gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues receivables or liabilities denominated in a
currency which is not a functional currency for the Fund and the time the Fund
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a currency which is not a functional currency of the
Fund, gains or losses attributable to fluctuations in the value of the currency
between the date of acquisition of the security and the date of disposition are
also treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of the Fund's investment company taxable income to be distributed to its
stockholders as ordinary income.
The Fund currently has four foreign currency pools, each of which uses
a different functional currency (namely, the Australian dollar, the Canadian
dollar, the Pound Sterling and the U.S. dollar). Gains and losses on
non-functional currency investments will first be translated into the functional
currency equivalent, which may result in Section 988 gains or losses as
described above, and then into their U.S. dollar equivalent for purposes of
computing U.S. tax liabilities. The Fund is not required to take into account
gains or losses attributable to fluctuations in the value of a functional
currency, which otherwise would be treated as Section 988 gains or losses,
described above. However, transfers between functional currency pools, including
remittances from a non-U.S. dollar currency pool to the United States, will
result in recognition of ordinary gains or losses attributable to fluctuations
in the value of the functional currency from which the Fund transferred.
88
Certain Securities Transactions.
Options, Futures and Forward Contracts. Any regulated futures
contracts and certain options (namely, non-equity options and dealer
equity options) in which the Fund may invest may be "section 1256
contracts." Gains (or losses) on these contracts generally are
considered to be 60% long-term and 40% short-term capital gains or
losses. Also, Section 1256 contracts held by the Fund at the end of
each taxable year (and on certain other dates prescribed in the Code)
are "marked to market" with the result that unrealized gains or losses
are treated as though they were realized.
Transactions in options, futures and forward contracts
undertaken by the Fund may result in "straddles" under the Code. The
straddle rules may affect the character of gains (or losses) realized
by the Fund, and losses realized by the Fund on positions that are part
of a straddle may be deferred under the straddle rules, rather than
being taken into account in calculating the taxable income for the
taxable year in which the losses are realized. In addition, certain
carrying charges (including interest expense) associated with positions
in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that the Fund may make with respect to its
straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
The straddle rules may increase the amount of short-term
capital gain realized by the Fund, which is taxed as ordinary income
when distributed to stockholders. Because application of the straddle
rules may affect the character of gains or losses, defer losses and/or
accelerate the recognition of gains or losses from the affected
straddle positions, the amount which must be distributed to
stockholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not
engage in such transactions.
Constructive Sales. Under certain circumstances, the Fund may
recognize gain from a constructive sale of an "appreciated financial
position" it holds if it enters into a short sale, forward contract or
other transaction that substantially reduces the risk of loss with
respect to the appreciated position. In that event, the Fund would be
treated as if it had sold and immediately repurchased the property and
would be taxed on any gain (but not loss) from the constructive sale.
The character of gain from a constructive sale would depend upon the
Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and
its character would depend on the Fund's holding period and the
application of various loss deferral provisions of the Code.
Constructive sale treatment does not apply to transactions closed
before the end of the 30th day after the close of the taxable year, if
certain conditions are met.
Foreign Withholding Taxes. Income received by the Fund from sources
within foreign countries may be subject to withholding and other taxes imposed
by such countries. For example, the Fund's interest income derived from
Australian sources generally is subject to a 10% Australian withholding tax. If
more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible and intends to elect to "pass-through" to the Fund's stockholders the
amount of foreign taxes paid by the Fund. Pursuant to this election, a
stockholder will be required to include in gross income (in addition to taxable
dividends actually received) his proportionate share of the foreign taxes paid
by the Fund, and will be entitled either to deduct (as an itemized deduction)
his pro rata share of foreign taxes in computing his taxable income or to use it
as a foreign tax credit against his U.S. Federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed by an individual
stockholder who does not itemize deductions. The deduction for foreign taxes is
not allowable in, computing alternative minimum taxable
89
income of non-corporate stockholders. A foreign stockholder may be subject to
U.S. withholding tax on such foreign taxes included in income, and may be unable
to claim a deduction or credit for such taxes. Each stockholder will be notified
within 60 days after the close of the Fund's taxable year whether the foreign
taxes paid by the Fund will "pass-through" for the year and of the amount of
such taxes deemed paid by the stockholder.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the stockholder's U.S. tax attributable to his foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its stockholders. With respect to
the Fund, certain gain from the sale of securities will be treated as derived
from U.S. sources and currency fluctuation gains, including fluctuation gains
from certain foreign currency denominated debt securities, receivables and
payables, may be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax credit), including
the foreign source passive income passed through by the Fund. Stockholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit limitation rules do
not apply to certain electing individual taxpayers who have limited creditable
foreign taxes and no foreign source income other than passive investment-type
income. The foreign tax credit is eliminated with respect to foreign taxes
withheld on dividends if the dividend paying shares or the shares of the Fund
are held by the Fund or the stockholder, as the case may be, for less than 16
days (46 days in the case of Preferred Stock) during the 30-day period (90-day
period for Preferred Stock) beginning 15 days (45 days for Preferred Stock)
before the shares become ex-dividend. In addition, if the Fund fails to satisfy
these holding period requirements, it cannot elect to "pass through" to
stockholders the ability to claim a deduction for the related foreign taxes. The
foreign tax credit can be used to offset only 90% of the alternative minimum tax
(as computed under the Code for purposes of this limitation) imposed on
corporations and individuals. If the Fund is not eligible to make the election
to "pass through" to its stockholders its foreign taxes, the foreign taxes it
pays will reduce its income and distributions by the Fund will be treated as
U.S. source income.
The foregoing is only a general description of the foreign tax credit
and, because application of the credit depends on the particular circumstances
of each stockholder, stockholders are advised to consult their own tax advisers.
Assuming that the Fund is eligible and does elect to pass foreign taxes
through to its stockholders, the Fund currently intends to designate Common and
Preferred stockholders' proportionate shares of foreign taxes in the same
proportion as the income subject to such taxes is distributed to each such
stockholder.
Backup Withholding. The Fund may be required to withhold U.S. Federal
income tax at the rate of 30% of all taxable distributions payable to
stockholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or when the Internal
Revenue Service has notified the Fund or a stockholder that the stockholder is
subject to backup withholding. Corporate stockholders and certain other
stockholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the stockholder's U.S. Federal. income tax liability.
Foreign Stockholders. The tax consequences to a foreign stockholder of
an investment in the Fund may be different from and more adverse than the tax
consequences to U.S. investors described herein. Foreign stockholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
90
Australian Taxes
The following discussion is based upon the advice of Stikeman, Elliott,
Australian counsel for the Fund and is a general and non-exhaustive summary of
Australian tax considerations which may be applicable to the Fund under current
law.
Under current Australian law, the Fund will be regarded as a
non-resident of Australia. Pursuant to the United States Australia Double Tax
Agreement ("Agreement") and assuming the Fund to be a resident of the United
States for the purposes of the Agreement, the Fund will not be regarded as
having a permanent establishment in Australia if it has no fixed place of
business or place of management in Australia and if there is no person (other
than a broker or other agent of independent status) in Australia who has
authority to conclude contracts on behalf of the Fund and habitually exercises
that authority. The Fund does not intend to have a fixed place of business or
place of management in Australia or to give any person (other than a broker or
other agent of independent status) in Australia the authority to conclude
contracts on behalf of the Fund, and accordingly none of the Fund's profits
arising from the disposal of its assets should be subject to Australian taxes.
The Fund will be subject to an interest withholding tax at the rate of 10% on
all interest payments (including discounts on money market securities) under
corporate debt instruments, money market securities and Australian Commonwealth
Government and State Government securities (unless the particular issue
qualifies for exemption from interest withholding tax). Australian interest
withholding tax does not apply to interest on Eurodollar obligations issued by
non-residents of Australia where the interest is not an expense incurred by that
person in carrying on business in Australia at or through a permanent
establishment in Australia of that non-resident. See "Taxation - United States
Taxes - Foreign Withholding Taxes." Generally, the Fund will not be subject to a
stamp duty on its investments in government and semi-government securities,
promissory notes and bills of exchange.
Canadian Taxes
The following discussion is based upon the advice of Stikeman, Elliott
(Toronto), Canadian counsel for the Fund, in reliance upon the information in
this Prospectus concerning the Fund (in particular the manner in which its
affairs will be conducted and the circumstances of its incorporation,
organization and management) and the investments which normally it will own, and
is a general and non-exhaustive summary with respect only to Canadian Federal
income tax considerations under the Income Tax Act (Canada) ("Act"), the Income
Tax Regulations thereunder and the Convention Between Canada and the United
States of America With Respect to Taxes on Income and Capital Gains (the
"Convention") which may be applicable to the Fund provided that under and for
purposes of the Convention the Fund is resident in the United States. It does
not in any respect constitute, and should not be relied upon as, advice to
investors in the Fund. Quoted references are to terms defined in the Act, Income
Tax Regulations or Convention unless otherwise specified.
General. The Fund will not be considered to be resident in Canada for
tax purposes. A corporation not resident in Canada generally is liable to tax
under the Act only if it carries on or is deemed to carry on business in Canada,
disposes of "taxable Canadian property" earns certain investment income from
Canadian sources.
The Fund does not intend to carry on or conduct its affairs such that
it would be considered to be carrying on or to use or hold its investments in
carrying on business in Canada. Even if the Fund was considered or deemed to be
carrying on business in Canada, it generally will be taxable in Canada in
respect to its "business profits" only if and to the extent that they are
attributable to a "permanent establishment" of the Fund in Canada, as those
expressions are defined in the Convention. The Fund generally will not be
regarded as having a "permanent establishment" in Canada if it has no fixed
place of
91
business or place of management, branch or office in Canada and if there is no
person acting in Canada on its behalf (other than a broker, general commission
agent or any other agent of independent status acting in the ordinary course of
its business) who has authority to conclude contracts in the name of the Fund
and habitually exercises that authority in Canada. The Fund does not intend to
have a fixed place of business or place of management, branch or office in
Canada, or to carry on its business or affairs in relation to Canada through any
person acting in Canada on its behalf (other than a broker or other agent of
independent status acting in the ordinary course of its business) who has
authority to conclude contracts in the name of the Fund in Canada.
"Taxable Canadian property" includes real property situated in Canada,
capital property used in or held in the course of carrying on a business in
Canada, shares of a corporation resident in Canada (other than a "public
corporation"), shares of a "public corporation" held by a person with a
substantial shareholding (generally a 25% or greater interest within five years
of a share disposition) in such corporation, interests in certain partnerships
and Canadian residents trusts, and options in respect of or interests in any
property which is described in the definition of "taxable Canadian property."
The Fund does not intend to acquire property which would be regarded as "taxable
Canadian property."
Accordingly, on the basis that the Fund does not dispose of "taxable
Canadian property" and does not carry on business in Canada through a "permanent
establishment," except as provided below with respect to non-resident
withholding tax, the Fund generally will not be subject to Canadian Federal
income tax.
Withholding Tax. Any amounts paid or credited, or deemed to be paid or
credited, as, on account or in lieu of payment of, or in satisfaction of certain
amounts including interest by a resident of Canada to a non-resident of Canada
generally is subject to a 25% non-resident withholding tax under the Act. The
rate of such non-resident withholding tax is reduced pursuant to the Convention
in certain cases including with respect to interest, generally to 15%.
Non-resident withholding tax under the Act may also apply to accrued
interest on certain obligations assigned or otherwise transferred (including
upon a redemption in whole or in part or a cancellation of such an obligation)
by a non-resident person to a person resident in Canada, and also in respect of
the excess of the price for which an obligation is assigned or otherwise
transferred over the price for which it was issued (or in certain cases assigned
or transferred by a resident of Canada to the non-resident). Obligations such as
those to which the exemptions from non-resident withholding tax described below
apply generally would not be affected by these rules. Various amounts payable by
a resident of Canada to a non-resident of Canada pursuant to a "securities
lending arrangement" (which would include both securities repurchase and
securities lending transactions) may also be subject to non-resident withholding
tax under the Act. Subject to certain exceptions and limitations, affected
amounts in this regard would include certain income or yield compensation
payments in respect to securities transferred to a Canadian resident "borrower"
pursuant to such an arrangement, certain payments on or in respect of collateral
provided by a "borrower" of such securities to a Canadian resident "lender" and
actual or deemed payments of fees by a Canadian resident "borrower" in respect
of such transactions.
Generally, interest paid or credited by non-residents of Canada will
not be subject to Canadian non-resident withholding tax except where the
interest is an expense incurred by the payor in carrying on business principally
in Canada or in carrying on certain manufacturing or natural resource-related
businesses in Canada and is deductible in computing the payor's taxable income
earned in Canada, is incurred by a partnership and is deductible in computing
income or loss from Canadian sources or on any mortgage or other indebtedness
secured by real property situated in Canada and is deductible in computing the
payor's taxable income earned in Canada.
92
Several exceptions from non-resident withholding tax on interest are
provided under the Act (other than for certain interest described in the Act,
generally of a contingent nature) and under the Convention. These include
exemptions for interest payable on most debt obligations issued, guaranteed or
insured by the Government of Canada, the governments or provinces of Canada or
instrumentalities of such governments (including municipalities and
government-owned corporations). Such exemptions are also provided under the Act
for interest payable on certain arm's length deposits with Canadian financial
institutions, and on certain arms' length obligations issued by Canadian
corporation's (generally if no more than 25% of the "principal amount" may be
required to be repaid within five years of issuance except upon a default,
certain instances of illegality of conversion of the obligation by the holder to
a "prescribed security").
New Zealand Taxes
The following discussion is based upon the advice of [New Zealand
Counsel,] New Zealand counsel for the Fund and is a general and non-exhaustive
summary of New Zealand tax considerations which may be applicable to the Fund
under current New Zealand tax law.
Under current New Zealand law, the Fund will be regarded as a
non-resident of New Zealand and will be relieved of New Zealand taxes on
business profits under the Convention between the United States of America and
New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income ("Convention"), if the Fund does not
have a permanent establishment in New Zealand, and assuming the Fund to be a
resident of the United States as that phrase is defined in the Convention, and
that the Fund's principal class of shares will be the subject of regular and
substantial trading on a recognized stock exchange (as so defined).
Pursuant to the Convention, the Fund will not be regarded as having a
permanent establishment in New Zealand if it has no fixed place of business,
place of management, branch or office in New Zealand and if there is no person
(other than a broker, general commission agent, or other agent of independent
status acting, in each case, in the ordinary course of its business) who acts on
behalf of the Fund and has and habitually exercises in New Zealand an authority
to conclude contracts in the name of the Fund. The Fund does not intend to have
a fixed place of business, place of management, branch, or office in New Zealand
or to give any person (other than a broker, general commission agent, or other
agent of independent status acting, in each case, in the ordinary course of its
business) the authority to conclude contracts in the name of the Fund in New
Zealand, and accordingly none of the business profits or gains from the
alienation of debt securities, except for interest (as provided below), of the
Fund should be subject to New Zealand taxes. Interest (as defined for New
Zealand tax law purposes) paid to the Fund by an "approved issuer" on debt
obligations that the "approved issuer" has issued and in respect of which a
prescribed "approved issuer levy" has been paid, will be subject to New Zealand
interest non-resident withholding tax at the rate of zero percent. All other
interest (as so defined) paid to the Fund will be subject to a New Zealand
interest non-resident withholding tax at the rate of 10% on the gross amount of
all payments of interest (as so defined) deemed to be derived from New Zealand
under corporate debt instruments, money market securities and New Zealand
government and local authority debt securities, except, in the latter two cases,
where interest is payable out of New Zealand and in the case of local authority
debt securities the approval of the New Zealand government has been given for
that interest payable on such debt securities to be exempted from New Zealand
income tax.
The issue to and transfer by the Fund of debt instruments will not be
subject to New Zealand stamp duty or Goods and Services Tax.
93
United Kingdom Taxes
The following discussion is general and non-exhaustive summary of the
United Kingdom tax considerations which may be applicable to the Fund under
current United Kingdom tax law. The Board of Directors of the Fund intends to
conduct the affairs of the Fund so that it does not become resident in the
United Kingdom for United Kingdom taxation purposes.
Pursuant to the Convention between the Government of the United States
of America and the Government of the United Kingdom of Great Britain and
Northern Ireland for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Convention"),
the Fund will not be regarded as having a permanent establishment in the United
Kingdom if it has no fixed place of business, branch or office in the United
Kingdom and, if there is no person (other than a broker, general commission
agent, or other agent of independent status acting, in each case, in the
ordinary course of business) in the United Kingdom who has and habitually
exercises authority to conclude contracts in the name of the Fund. The Fund does
not intend to have a fixed place of business, branch or office in the United
Kingdom or to give any person (other than a broker, general commission agent, or
other agent of independent status acting, in each case, in the ordinary course
of business) the authority to conclude contracts in the name of the Fund in the
United Kingdom. Accordingly, none of the business profits of the Fund should be
subject to United Kingdom taxation.
United Kingdom source interest payments received by the Fund may be
subject to United Kingdom income tax, either by way of withholding or by way of
direct assessment. However, pursuant to the Convention, as the Fund does not
intend to have a permanent establishment in the United Kingdom, the Fund should
be entitled to claim exemption from any such liability to United Kingdom
taxation, unless (a) the Fund is exempt from tax on such interest income in the
United States and the Fund sells or makes a contract to sell the holdings from
which such interest is derived within three months of the date the Fund acquired
such holding, or (b) 25% or more of the capital of the Fund is owned directly or
indirectly by one or more persons who are not individual residents and are not
nationals of the United States.
Provided that the Fund is not resident in the United Kingdom and is not
carrying on a trade in the United Kingdom through a branch or agency for the
purposes of United Kingdom taxation, the Fund will not be subject to United
Kingdom tax on capital gains made by the Fund. Accordingly, the Fund does not
intend to carry on a trade in the United Kingdom through a branch or agency for
the purposes of United Kingdom taxation.
Other Taxes
The discussions above regarding Australian, Canadian, New Zealand and
United Kingdom tax issues describe the tax effects of the Fund's activities in
the primary markets in which the Fund invests. The Fund has not sought similar
advice from counsel in other jurisdictions in which the Fund invests or may
invest in the future. However, the Fund believes, but cannot represent, that its
business profits should not be subject to taxation in any jurisdiction not
mentioned specifically above provided that the Fund is not resident in any such
jurisdiction and is not carrying on a trade in such jurisdiction through a
branch or agency for the purposes of taxation in such jurisdiction. The Board of
Directors of the Fund intends to conduct the affairs of the Fund so that it does
not become resident in other country for tax purposes. There can be no
assurance, however, that the Fund will not become subject to taxation in any
jurisdiction in which it invests.
94
CAPITAL STOCK
General
Set forth below is information with respect to the Fund's outstanding
securities as of July 31, 2002:
Number of
Shares Held
by the Fund Number of Shares
Number of Shares or for its Issued and
Title of Class Authorized Account Outstanding
-------------- ---------- ------- -----------
Common Stock ..................................... 300,000,000 shares -0- 9,266,209
Preferred Stock .................................. 100,000,000 shares -0- 1,200
Common Stock
The Fund's Articles authorize the issuance of up to 300,000,000 shares
of Common Stock. As of July 31, 2002, there were 9,266,209 outstanding shares of
Common Stock of the Fund, all of which are fully paid and non-assessable. All
shares of Common Stock are equal as to dividends, assets and voting privileges
and have no conversion, preemptive or other subscription rights. In the event of
liquidation, each share of Common Stock is entitled to its proportion of the
Fund's assets after the payment of debts and expenses and after payment of the
aggregate liquidation preference to holders of Preferred Stock, including the
liquidation preference of $25,000 per share, plus accumulated but unpaid
dividends (whether or not earned or declared), on the outstanding shares of
Preferred Stock. Holders of shares of Common Stock are entitled to one vote per
share and do not have cumulative voting rights. The Fund will hold regular
annual meetings of stockholders in accordance with the laws of Maryland and the
rules of the NYSE.
The shares of the Fund's Common Stock commenced trading on the NYSE on
March 12, 1992. For the quarter ended July 31, 2002, the highest trading price
was $10.40 and the lowest trading price was $8.91. During the same period, the
net asset value ranged from a low of $9.70 to a high of $10.52. Total trading
volume during the period was 2,600,100 shares. On July 31, 2002, the closing
price on the NYSE was $9.75 and the net asset value was $10.18.
Preferred Stock
The Fund's Articles authorize the issuance of up to 100,000,000 shares
of Preferred Stock, $0.001 par value, in one or more series, with rights as
determined by the Board of Directors, by action by the Board of Directors
without the approval of the holders of Common Stock. As of July 31, 2002, an
aggregate of 1,200 shares of Preferred Stock in one series, designated as Series
W-7, with an aggregate liquidation preference of $30 million, was outstanding.
Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of Preferred Stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Although the Fund has no current intention to issue additional shares
of Preferred Stock, it may issue additional shares of Preferred Stock at a time
the Board deems appropriate after completion of this Offer.
Beneficial Ownership
To the best of the Fund's knowledge, as of October 1, 2002, no person
or group beneficially owned more than 5% of the outstanding shares of Common
Stock or Preferred Stock of the Fund.
95
No Preemptive Rights
No holder of shares of the Fund has any preemptive right to acquire
from the Fund any capital stock of the Fund whether now or hereafter authorized.
Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Fund, the holders of shares of any series of Preferred
Stock would be entitled to receive a preferential liquidating distribution (to
equal the liquidation value of $25,000 per share plus accrued and unpaid
dividends, whether or not declared) before any distribution of assets is made to
holders of Common Stock. After payment of the full amount of the liquidating
distribution to which they are entitled, the Preferred Stockholders would not be
entitled to any further participation in any distribution of assets by the Fund.
Voting Rights
Except as otherwise required by applicable law, or by terms of the
Fund's Articles or as may be established at the time of the issuance of any
series of Preferred Stock, holders of shares of Preferred Stock, voting as a
separate class, are entitled to elect two of the Fund's Directors, and the
remaining Directors will be elected by holders of Common Stock. If at any time
dividends on shares of the Fund's Preferred Stock are unpaid in an amount equal
to two full years' dividends, the holders of outstanding shares of Preferred
Stock, voting as a separate class, will be entitled to elect a majority of the
Fund's Directors until all dividends in default have been paid or declared and
set apart for payment.
The terms of the Preferred Stock require a separate class vote of the
Preferred Stock with respect to matters which would affect adversely any
preferences, rights, or powers applicable to the Preferred Stock. Moreover, the
affirmative vote of the holders of a majority of the outstanding shares of
Preferred Stock, voting as a separate class, would be required to approve any
plan of reorganization adversely affecting these shares or any action requiring
a vote of security holders under Section 13(a) of the 1940 Act.
Redemption, Purchase and Sale of Preferred Stock by the Fund
The terms of the Preferred Stock provide that the shares are redeemable
by the Fund in whole or in part, at the liquidation value of $25,000 per share
plus accrued dividends per share, that the Fund may tender for or purchase
shares of Preferred Stock and that the Fund may subsequently resell any shares
so tendered for or purchased. Any redemption or purchase of shares of Preferred
Stock by the Fund will reduce the leverage applicable to shares of Common Stock,
while any resale of shares by the Fund will increase such leverage. The Fund may
also need to redeem all or a portion of the Preferred Stock pursuant to the
requirements of either the 1940 Act or the rating agencies rating the Preferred
Stock. The leveraging of the Common Stock would be eliminated during any period
that Preferred Stock is not outstanding.
Asset Coverage
Under the 1940 Act, the Fund is not permitted to issue shares of
Preferred Stock unless immediately after the issuance the asset coverage of the
Fund's portfolio is at least 200% of the liquidation value of the outstanding
Preferred Stock ($25,000 plus any accrued and unpaid dividends). In addition,
the Fund is not permitted to declare any cash dividend or other distribution on
its Common Stock unless, at the time of the declaration, the NAV of the Fund's
portfolio (determined after deducting
96
the amount of any dividend or other distribution) is at least 200% of the
liquidation value of the Preferred Stock.
Under the terms of the Preferred Stock, the Fund may be required to
suspend distributions to holders of Common Stock in order to maintain the asset
coverage required by the 1940 Act. The suspension of distributions might prevent
the Fund from qualifying as a regulated investment company for Federal income
tax purposes, or, if the Fund retains the qualification, may cause the Fund to
incur income and excise taxes on its undistributed income. Further, the Fund may
be required to redeem Preferred Stock in order to restore asset coverage to an
acceptable level. In order to effect such redemptions, the Fund may be required
to dispose of assets for cash, which may result in recognition of gain or loss
to the Fund for tax purposes. This gain or loss may be treated, in whole or in
part for Federal income tax purposes, as gain or loss due to fluctuations in
foreign currency values, which under current law is ordinary rather than capital
in character. Ordinary gain or loss will increase, decrease, or possibly
eliminate the Fund's investment company taxable income distributable to holders
of Common Stock. For example, if losses attributable to foreign currency
fluctuations exceed other investment company taxable income during a taxable
year, the Fund would not be able to make ordinary dividend distributions, or
distributions made would be treated as a return of capital to stockholders for
Federal income tax purposes, rather than as an ordinary dividend, reducing each
stockholder's tax basis in his Fund shares. Conversely, gain (including gain
attributable to foreign currency fluctuations) arising from the sale of Fund
assets to redeem Preferred Stock would increase the amounts required to be
distributed to holders of Common Stock in order for the Fund to retain its
qualification as a regulated investment company and/or to avoid imposition of
income or excise taxes on the Fund. See "Taxation."
The Fund's outstanding Preferred Stock is currently rated Aa2 by
Moody's and AA by S&P. In order to retain these ratings, the Fund is required to
maintain portfolio holdings meeting specified guidelines of these rating
agencies. The guidelines impose asset coverage requirements that are more
stringent than those imposed by the 1940 Act.
Rating Agency Guidelines
The Fund intends that, so long as shares of Preferred Stock are
outstanding, the composition of its portfolio will reflect guidelines
established by the rating agencies in connection with the Fund's receipt of a
rating for the Preferred Stock of at least Aa2 from Moody's and at least AA from
S&P. Moody's and S&P issue ratings for various securities reflecting the
perceived creditworthiness of those securities. The guidelines are designed to
ensure that assets underlying outstanding debt or preferred stock will be
sufficiently varied and will be of sufficient quality and amount to justify
investment grade ratings. The guidelines do not have the force of law but have
been adopted by the Fund in order to receive the above-described ratings for
shares of Preferred Stock, which ratings are generally relied upon by
institutional investors in purchasing such securities. The guidelines provide a
set of tests for portfolio composition and asset coverage that supplement (and
in some cases are more restrictive than) the applicable requirements under the
1940 Act.
The Fund intends to maintain a portfolio value at least equal to the
discounted value of the assets in its portfolio which satisfies minimum values
set by each of the rating agencies. Upon any failure to do this, the Fund will
seek to alter the composition of its portfolio to satisfy the rating agency. To
the extent it is not able to do so in a timely basis, the Fund may redeem shares
of Preferred Stock in accordance with their terms.
A securities rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal at any time by the assigning
rating agency. Each rating should be evaluated independently of any other
rating.
97
Certain Provisions of the Articles and Articles Supplementary
The Fund has provisions in its Articles that could have the effect of
limiting (i) the ability of other entities or persons to acquire control of the
Fund, (ii) the Fund's freedom to engage in certain transactions, and (iii) the
ability of the Fund's Directors or stockholders to amend the Articles or effect
changes in the Fund's management. The provisions of the Articles may be regarded
as "anti-takeover" provisions. The Articles provide for a staggered election of
those Directors who are elected by the holders of Common Stock, with the
Directors divided into three classes, each having a term of three years.
Accordingly, only those Directors in one class may be changed in any one year,
and it would require two years for Stockholders to change a majority of the
Board of Directors. This system of electing Directors may have the effect of
maintaining the continuity of management and, thus, make it more difficult for
the Fund's Stockholders to change the majority of Directors.
Under Article VIII of the Fund's Articles, a vote of the holders of
shares representing at least 80% of the outstanding shares of the Fund's Common
Stock and Preferred Stock of all series voting as a single class is necessary to
effect any of the following actions unless the Continuing Directors (as defined
in the Articles) of the Fund by the vote of at least 66-2/3% of such Directors,
approve such action, in which case, except as otherwise required by law or the
Articles of the Fund, with respect to those matters and transactions for which a
stockholder vote is required under Maryland law, the requisite vote is at least
a majority of the outstanding shares of the Fund's Common Stock and Preferred
Stock of all series voting as a single class and with respect to those matters
and transactions for which a stockholder vote is not required under Maryland
law, no stockholder vote will be required:
(i) any amendment to the Fund's Articles to make the Fund's
Common Stock a "redeemable security" (as such term is defined in the
1940 Act) or to otherwise effect the conversion of the Fund from
closed-end to open-end status under the 1940 Act;
(ii) any amendment to the Article VI of the Fund's Articles to
provide for fewer than three classes of Directors elected by the
holders of Common Stock;
(iii) any amendment to the Fund's Articles to reduce the 80%
vote required by the holders of the Fund's Common Stock and the
Preferred Stock or the 66-2/3% vote required by the Continuing
Directors pursuant to Article VIII of the Fund's Articles;
(iv) any amendment to Article X of the Fund's Articles providing
that Articles VI, VIII and X may not be amended without the approval of
holders of shares of stock representing at least 80% of the outstanding
shares of the Fund's Common Stock and Preferred Stock of all series
voting as a single class;
(v) any stockholder proposal as to specific investment
decisions made or to be made with respect to the Fund's assets;
(vi) any merger or consolidation of the Fund with or into any
other person;
(vii) the liquidation or dissolution of the Fund;
(viii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) to
or with any other person of any assets of the Fund having an aggregate
fair market value of $1,000,000 or more except for transactions of the
Fund effected in the ordinary course of the Fund's investment
activities; or
98
(ix) the issuance or transfer by the Fund (in one transaction or
a series of transactions) of any securities of the Fund to any other
person in exchange for cash, securities or other property (or a
combination thereof) having an aggregate fair market value of
$1,000,000 or more excluding (1) sales of any securities of the Fund in
connection with a public offering thereof, (2) issuance of any
securities of the Fund pursuant to a dividend reinvestment plan adopted
by the Fund and (3) issuances of any securities for the Fund upon the
exercise of any stock subscription rights distributed by the Fund.
Articles Supplementary approved by the Board of Directors in August
2000 subject the Fund to certain provisions of Subtitle 8 of the Maryland
General Corporation Law with respect to unsolicited takeovers. These provisions
(i) provide that the stockholders of the Fund may remove any director by the
affirmative vote of at least two-thirds of all the votes entitled to be cast by
the stockholders generally in the election of directors, (ii) require that the
number of directors of the Fund shall be fixed only by the vote of the Board of
Directors, (iii) provide that a vacancy on the Board of Directors due to an
increase in the size of the Board or the death, resignation or removal of a
director, may be filled only by the affirmative vote of the majority of the
remaining directors in office, even if the remaining directors do not constitute
a quorum, and (iv) provide that the Secretary of the Fund may call a special
meeting of stockholders only on the written request of the stockholders entitled
to cast at least a majority of all votes entitled to be cast at the meeting.
The foregoing provisions may be regarded as "anti-takeover" provisions
and may have the effect of depriving Stockholders of an opportunity to sell
their shares at a premium over prevailing market prices.
CUSTODIAN, DIVIDEND PAYING AGENTS, TRANSFER AGENTS,
REGISTRARS AND AUCTION AGENT
Pursuant to a Custodian Contract dated February 20, 1992, as amended
from time to time, State Street Bank and Trust Company ("State Street"), One
Heritage Drive, North Quincy, Massachusetts 02171, acts as the Fund's custodian
for assets of the Fund held in the United States. The Board has delegated
various foreign custody responsibilities to State Street, as the "Foreign
Custody Manager" for the Fund to the extent permitted under the 1940 Act and the
rules thereunder. State Street has entered into agreements with foreign
sub-custodians in accordance with delegation instructions approved by the Board.
State Street, its branches and sub-custodian generally hold certificates for the
securities in their custody, but may, in certain cases, have book records with
domestic and foreign securities depositories, which in turn have book records
with the transfer agents of the issuers of the securities. See "Risk Factors and
Special Considerations - Foreign Custody."
[Name of Transfer Agent], [address], acts as the Fund's dividend paying
agent, transfer agent and registrar for the Fund's Common Stock. Bankers Trust,
4 Albany Street, New York, New York 10006, acts as Auction Agent for the
Preferred Stock and also acts as transfer agent, registrar, dividend disbursing
agent and redemption agent for the Preferred Stock.
EXPERTS
The financial statements, insofar as they relate to the periods through
October 31, 2001, included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, the Fund's independent accountants,
given on the authority of said firm as experts in accounting and auditing. The
principal place of business of PricewaterhouseCoopers LLP is located at 1177
Avenue of the Americas, New York, New York 10036. The audit services they
provide include examination of the
99
financial statements of the Fund, services relating to filings by the Fund with
the SEC and consultation on matters related to the preparation and filing of tax
returns.
DISTRIBUTION ARRANGEMENTS
Dealer Managers will act as Dealer Managers for the Offer ("Dealer
Managers"). Under the terms and subject to the conditions contained in the
Dealer Manager Agreement dated [date on cover], among the Fund and the Dealer
Managers ("Dealer Manager Agreement"), the Dealer Managers will provide
financial advisory and marketing services in connection with the Offer and will
solicit the exercise of Rights and participation in the Over-Subscription
Privilege. The Offer is not contingent upon any number of Rights being
exercised. The Fund has agreed to pay the Dealer Managers a fee for their
financial advisory, marketing and soliciting services equal to 3.75% of the
aggregate Subscription Price for Shares issued pursuant to the Offer. The Dealer
Manager fee will be borne by the Fund and indirectly by all of the Fund's
Stockholders, including those who do not exercise their Rights.
The Dealer Managers will reallow to broker-dealers included in the
selling group to be formed and managed by the Dealer Managers ("Selling Group
Members") selling fees equal to 2.50% of the Subscription Price per Share for
each Share issued pursuant to the Offer as a result of their selling efforts. In
addition, the Dealer Managers will reallow to other broker-dealers that have
executed and delivered a soliciting dealer agreement and have solicited the
exercise of Rights, solicitation fees equal to 0.50% of the Subscription Price
per Share for each Share issued pursuant to the exercise of Rights as a result
of their soliciting efforts, subject to a maximum fee based upon the number of
shares of Common Stock held by each broker-dealer through DTC on the Record
Date. Fees will be paid to the broker-dealer designated on the applicable
portion of the Subscription Certificates or, in the absence of such designation,
to the Dealer Managers.
In addition, the Fund may reimburse the Dealer Managers up to an
aggregate of $50,000 for their reasonable expenses incurred in connection with
the Offer. The Fund has agreed to indemnify the Dealer Managers or contribute to
losses arising out of certain liabilities including liabilities under the 1933
Act. The Dealer Manager Agreement also provides that the Dealer Managers will
not be subject to any liability to the Fund in rendering the services
contemplated by such Agreement except for any act of bad faith, willful
misconduct or gross negligence of the Dealer Managers or reckless disregard by
the Dealer Managers of their obligations and duties under such Agreement.
Prior to the expiration of the Offer, the Dealer Managers may
independently offer for sale shares of Common Stock, including Shares acquired
through purchasing and exercising the Rights, at prices they set. The Dealer
Managers may realize profits or losses independent of any fees described in this
Prospectus.
In the ordinary course of their businesses, the Dealer Managers and
their respective affiliates may engage in investment banking or financial
transactions with the Fund, the Investment Manager, the Investment Adviser and
their affiliates.
The Fund will bear the expenses of the Offer, which will be paid from
the proceeds of the Offer. These expenses include, but are not limited to: the
expense of preparation and printing of the Prospectus for the Offer, the expense
of counsel and auditors in connection with the Offer, and the out-of-pocket
expenses incurred by the Officers of the Fund and others in connection with the
Offer.
The principal business address of [Dealer Manager 1] is
_______________________. The principal business address of [Dealer Manager 2]
is _______________________. The principal
100
business address of [Dealer Manager 3] is __________________________. The
principal business address of [Dealer Manager 4] is _____________________.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for the
Fund by Dechert, 1775 Eye Street, NW, Washington, DC 20006 and certain legal
matters relating to the offering will be passed on for the Dealer Managers by
[Dealer Managers' counsel], [address]. Dechert and [Dealer Managers' counsel]
will rely as to matters of Maryland law on the opinion of Venable, Baetjer and
Howard, Two Hopkins Plaza, Suite 1800, Baltimore, MD 21201-2978. Matters of
Australian law will be passed on for the Fund by Stikeman, Elliott, Level 40
Chifley Tower, 2 Chifley Square, Sydney, NSW 2000, Australia. Matters of
Canadian law will be passed on for the Fund by Stikeman, Elliott, 5300 Commerce
Court West, Toronto, Ontario, M5L 1B9, Canada. Matters of New Zealand law will
be passed on for the Fund by [New Zealand Counsel], [address], New Zealand.
Matters of the law of Jersey, Channel Islands will be passed on for the Fund by
[Jersey Counsel], [address], Jersey, Channel Islands. Matters of United Kingdom
law will be passed on for the Fund by [UK Counsel],[address], United Kingdom.
Matters of Swiss law will be passed on for the Fund by [Swiss Counsel],
[address], Switzerland. Matters of the law of Singapore will be passed on for
the Fund by [Singapore Counsel], [address], Singapore.
101
Roy M. Randall, a partner of Stikeman, Elliott in Australia, serves as
Secretary of the Fund. Margaret A. Bancroft, Sander M. Bieber and Allan S.
Mostoff, members of Dechert, each serves as Assistant Secretary to the Fund.
102
Portfolio of Investments
As of October 31, 2001
Principal
Amount
Local
Currency (a) Value
(000) Description (US$)
-------------------------------------------------------
LONG-TERM INVESTMENTS -- 86.1%
AUSTRALIA -- 22.7%
Government Bonds -- 7.9%
A$
Commonwealth of Australia,
1,500 12.00%, 11/15/01 ................ 759,262
3,000 10.00%, 10/15/02 ................ 1,600,162
2,000 9.50%, 8/15/03 .................. 1,105,195
1,000 10.00%, 2/15/06 ................. 612,943
1,500 6.75%, 11/15/06 ................. 829,706
1,000 10.00%, 10/15/07 ................ 640,610
3,000 8.75%, 8/15/08 .................. 1,844,399
2,500 7.50%, 9/15/09 .................. 1,459,240
1,500 6.50%, 5/15/13 .................. 831,114
-----------
Total Australian
government bonds
(cost US$12,479,058) ............ 9,682,631
-----------
Semi-Government Bonds-- 9.0%
New South Wales-- 3.9%
New South Wales Treasury
Corporation,
2,000 8.00%, 12/01/01 ................. 1,011,864
1,500 7.00%, 4/01/04 .................. 801,897
4,200 7.00%, 12/01/10 ................. 2,358,379
First Australian National
Mortgage Acceptance
Corporation, Series 22,
1,288 11.40%, 12/15/01 ................ 654,911
-----------
4,827,051
-----------
Queensland -- 1.9%
Queensland Treasury Corporation,
2,000 8.00%, 5/14/03 (Global) ......... 1,068,036
1,000 8.00%, 9/14/07 (Global) ......... 580,519
1,250 6.00%, 6/14/21 .................. 652,114
-----------
2,300,669
-----------
Victoria -- 1.5%
A$
State Electricity Commission
of Victoria,
535 10.50%, 5/27/03 ................. 294,422
Treasury Corporation of Victoria,
1,000 9.00%, 6/27/05 .................. 572,695
1,500 10.25%, 11/15/06 ................ 904,094
-----------
1,771,211
-----------
Western Australia -- 1.7%
Western Australia Treasury
Corporation,
3,500 8.00%, 6/15/13 .................. 2,122,181
-----------
Total Australian
semi-government bonds
(cost US$13,180,192) ............ 11,021,112
-----------
Supranational -- 2.6%
Eurofima,
3,500 9.875%, 1/17/07 ................. 2,156,053
Federal National Mortgage
Association, Series EMTN,
2,000 6.375%, 8/15/07 ................. 1,071,576
-----------
Total Australian dollar
supernational bonds
(cost US$3,221,689) ............. 3,227,629
-----------
Utilities -- 0.9%
Telstra Corp.,
2,000 11.50%, 10/15/02 ................ 1,077,209
-----------
Total Australian utility bonds
(cost US$1,745,314) ............. 1,077,209
-----------
14 Aberdeen Commonwealth Income Fund, Inc.
Portfolio of Investments (continued)
As of October 31, 2001
Principal
Amount
Local
Currency (a) Value
(000) Description (US$)
-------------------------------------------------------------------
Banking and Finance -- 0.2%
A$
ING Mercantile Mutual Bank Ltd.,
500 7.125%, 3/13/02 ............................. 254,381
-----------
Total Australian banking
and finance bonds
(cost US$379,514) ........................... 254,381
-----------
Corporate Non-Banks-- 2.1%
Brisbane Airport Corporation, Ltd.,
4,000 7.30%, 6/30/10 .............................. 2,185,342
GE Capital Australia,
600 6.75%, 9/15/07 .............................. 325,353
-----------
Total Australian corporate
non-bank bonds
(cost US$2,507,134).......................... 2,510,695
-----------
Total Australian long-term
investments
(cost US$33,512,901) ........................ 27,773,657
-----------
CANADA -- 26.9%
Government Bonds -- 20.6%
C$
Canadian Government,
6,000 8.50%, 4/01/02 .............................. 3,877,764
5,000 5.25%, 9/01/03 .............................. 3,286,745
2,500 7.25%, 6/01/07 .............................. 1,801,242
2,000 5.50%, 6/01/09 .............................. 1,322,249
1,000 10.75%, 10/01/09............................. 873,824
3,000 10.25%, 3/15/14 ............................. 2,784,199
4,000 8.00%, 6/01/23 .............................. 3,333,241
8,000 9.00%, 6/01/25 .............................. 7,398,412
Canada (Cayman),
750 7.25%, 6/01/08 .............................. 535,354
-----------
Total Canadian
government bonds
(cost US$27,436,077) ........................ 25,213,030
-----------
Semi-Government Bonds -- 5.4%
British Columbia -- 1.3%
C$
Province of British Columbia,
2,000 9.50%, 1/09/12 .............................. 1,662,738
-----------
Ontario -- 0.9%
Ontario Hydro,
500 8.50%, 5/26/25 .............................. 413,639
Province of Ontario,
1,000 8.75%, 4/22/03 .............................. 684,262
-----------
1,097,901
-----------
Quebec -- 2.8%
Quebec Hydro,
1,500 7.00%, 6/01/04 .............................. 1,029,143
1,000 2.512%, 1/28/05 (b) ......................... 635,056
2,000 9.625%, 7/15/22 ............................. 1,757,343
-----------
3,421,542
-----------
Toronto -- 0.4%
Metropolitan Municipality of Toronto,
750 9.625%, 5/14/02 ............................. 489,951
-----------
Total Canadian
semi-government bonds
(cost US$7,117,360) .......................... 6,672,132
-----------
Utilities -- 0.3%
Bell Telephone Company of Canada,
500 10.50%, 7/15/09 ............................. 334,791
-----------
Total Canadian
utility bonds
(cost US$433,599) ........................... 334,791
-----------
Aberdeen Commonwealth Income Fund, Inc. 15
Portfolio of Investments (continued)
As of October 31, 2001
Principal
Amount
Local
Currency(a) Value
(000) Description (US$)
------------------------------------------------------
Banking and Finance -- 0.6%
C$
Credit Local de France,
1,000 6.75%, 3/21/06 ................. 688,619
------------
Total Canadian banking
and finance bonds
(cost US$709,119) .............. 688,619
------------
Total Canadian
long-term investments
(cost US$35,696,155) ........... 32,908,572
------------
MALAYSIA -- 0.6%
Semi-Government Bonds -- 0.6%
MYR
Danamodal Nasional Berhad,
3,100 0.00%, 10/21/03 ................ 770,513
------------
Total Malaysia
long-term investments
(cost US$740,333) .............. 770,513
------------
NEW ZEALAND -- 1.8%
Government Bonds -- 0.3%
NZ$
Canadian Government,
1,000 6.625%, 10/03/07 ............... 424,500
------------
Total New Zealand
government bonds
(cost US$557,544) .............. 424,500
------------
Utilities -- 0.7%
NZ$
Electricity Corporation of
New Zealand Ltd.,
1,000 8.00%, 2/15/03 ................. 428,466
------------
TCNZ Finance Limited,
1,000 9.25%, 7/01/02 ................. 422,412
------------
Total New Zealand
utility bonds
(cost US$1,189,893) ............ 850,878
------------
Banking and Finance-- 0.2%
Transpower Finance Ltd.,
500 8.00%, 6/15/05 ................. 221,378
------------
Total New Zealand
banking and finance bonds
(cost US$348,382) .............. 221,378
------------
Corporate Non-Banks-- 0.6%
Housing New Zealand,
1,500 8.00%, 11/15/06 ................ 674,999
------------
Total New Zealand
corporate non-bank bonds
(cost US$806,899) .............. 674,999
------------
Total New Zealand
long-term investments
(cost US$2,902,718) ............ 2,171,755
------------
16 Aberdeen Commonwealth Income Fund, Inc.
Portfolio of Investments (continued)
As of October 31, 2001
Principal
Amount
Local
Currency(a) Value
(000) Description (US$)
-----------------------------------------------------
PHILIPPINES -- 0.1%
Government Bonds -- 0.1%
PHP
Philippine Government,
7,000 16.50%, 2/25/09 ............... 130,389
-----------
Total Philippine
long-term investments
(cost US$204,198) ............. 130,389
-----------
SINGAPORE -- 0.5%
Government Bonds -- 0.4%
SG$
Singapore Government,
100 3.00%, 11/01/02 ............... 55,896
540 4.00%, 2/01/05 ................ 316,132
50 4.00%, 3/01/07 ................ 29,678
70 4.625%, 7/01/10 ............... 43,515
-----------
Total Singapore
government bonds
(cost US$444,966) ............. 445,221
-----------
Utilities -- 0.1%
Singapore Power,
250 4.60%, 9/21/07 ................ 150,979
-----------
Total Singapore corporate
non-bank bonds
(cost US$144,047) ............. 150,979
-----------
Total Singapore
long-term investments
(cost US$589,013) ............. 596,200
-----------
SOUTH KOREA -- 3.0%
Government Bonds -- 1.3%
US$
EMBARC Ltd. Linked Note
Series 1-9,
2,000 5.660%, 8/18/03 (b)(c) ........ 1,640,920
-----------
Government Banks -- 1.7%
EMBARC Ltd. Linked Note
Series 1-7,
2,600 5.044%, 6/28/02 (b)(d) ........ 2,052,102
-----------
Total Korean
long-term investments
(cost US$4,257,612) ........... 3,693,022
-----------
THAILAND -- 0.5%
Government Bonds -- 0.3%
THB
Thailand Government,
5,000 6.125%, 4/12/02 (e) ........... 113,554
550 8.25%, 10/14/03 (e) ........... 13,534
12,000 8.00%, 12/08/06 (e) ........... 313,391
-----------
Total Thailand
government bonds
(cost US$491,869) ............. 440,479
-----------
Utilities -- 0.1%
Eastern Water Resources
Development and Management
Company Limited,
4,000 9.00%, 7/22/04 (e) ............ 98,423
-----------
Total Thailand utility bonds
(cost US$102,863) ............. 98,423
-----------
Aberdeen Commonwealth Income Fund, Inc. 17
Portfolio of Investments (continued)
As of October 31, 2001
Principal
Amount
Local
Currency (a) Value
(000) Description (US$)
-------------------------------------------------------------
Corporate Non-Banks -- 0.1%
THB
Advanced Info Service
Public Company Limited,
5,200 6.50%, 3/20/03 (e) .................. 119,579
------------
Total Thailand corporate
non-bank bonds
(cost US$137,821) ................... 119,579
------------
Total Thailand
long-term investments
(cost US$732,553) ................... 658,481
------------
UNITED KINGDOM -- 30.0%
Government Bonds -- 22.6%
(Pounds)
United Kingdom Treasury,
1,000 7.00%, 11/06/01 ..................... 1,454,786
1,500 8.00%, 6/10/03 ...................... 2,312,263
500 5.00%, 6/07/04 ...................... 740,136
1,250 8.50%, 12/07/05 ..................... 2,087,830
1,100 7.50%, 12/07/06 ..................... 1,811,467
500 5.75%, 12/07/09 ..................... 783,940
1,500 8.00%, 9/27/13 ...................... 2,858,821
600 8.00%, 12/07/15 ..................... 1,180,392
3,000 8.00%, 6/07/21 ...................... 6,328,770
2,350 6.00%, 12/07/28 ..................... 4,259,484
Republic of Finland,
1,000 8.00%, 4/07/03 ...................... 1,522,611
1,250 10.125%, 6/22/08 .................... 2,306,413
------------
Total United Kingdom
government bonds
(cost US$29,697,591) ................ 27,646,913
------------
Utilities -- 3.1%
(Pounds)
British Gas PLC,
1,400 8.875%, 7/08/08 ..................... 2,397,904
Thames Water Utilities
Finance PLC,
1,000 10.50%, 11/21/01 .................... 1,458,189
------------
Total United Kingdom
utility bonds
(cost US$4,037,929) ................. 3,856,093
------------
Banking and Finance -- 4.3%
Abbey National Treasury
Services PLC,
1,250 8.00%, 4/02/03 ...................... 1,900,507
Barclays Bank PLC,
1,000 9.875%, 5/29/49 ..................... 1,776,791
Lloyds Bank PLC,
500 7.375%, 3/11/04 ..................... 764,643
Prudential Finance B.V.,
500 9.375%, 6/04/07 ..................... 855,174
------------
Total United Kingdom
banking and finance bonds
(cost US$5,061,377) ................. 5,297,115
------------
Total United Kingdom
long-term investments
(cost US$38,796,897) ................ 36,800,121
------------
Total long-term investments
(cost US$117,432,380) ............... 105,502,710
------------
18 Aberdeen Commonwealth Income Fund, Inc.
Portfolio of Investments (concluded)
As of October 31, 2001
Principal
Amount
Local
Currency (a) Value
(000) Description (US$)
--------------------------------------------------------
SHORT-TERM INVESTMENTS -- 11.9%
Australia -- 1.2%
A$
Banque Nationale de Paris
Fixed Deposit,
2,895 4.25%, 11/01/01
(cost US$1,460,669) .............. 1,460,669
----------
Canada -- 4.1%
C$
State Street Bank and
Trust Company Time Deposit,
7,891 2.40%, 11/07/01
(cost US$4,999,367) .............. 4,973,528
----------
New Zealand -- 2.1%
NZ$
State Street Bank and
Trust Company Time Deposit,
6,075 4.40%, 11/07/01
(cost US$2,524,770) .............. 2,508,368
----------
United Kingdom -- 0.7%
(Pounds)
State Street Bank and
Trust Company Fixed Deposit,
610 4.00%, 11/07/01
(cost US$887,123) ................ 887,123
----------
United States -- 3.8%
US$
4,710 Repurchase Agreement,
State Street Bank and Trust
Company, 2.48% dated
10/31/01, due 11/01/01 in
the amount of $4,710,324
(collateralized by $3,375,000
U.S. Treasury Bonds, 8.875% due
8/15/17; value $4,818,258)
(cost US $4,710,000) ............. 4,710,000
----------
Total short-term
investments
(cost US$14,581,929) ............. 14,539,688
----------
----------------------------------------------------------------------------------------------
Total Investments -- 98.0% (cost US$132,014,309) 120,042,398
Unrealized depreciation on forward foreign currency exchange contracts -- 0.0% (f) (1,037)
Other assets in excess of liabilities-- 2.0% 2,497,796
----------------------------------------------------------------------------------------------
Total Net Assets -- 100.0% $122,539,157
==============================================================================================
(a) Portfolio securities are listed based on currency in which they are traded;
A$ -- Australian dollar NZ$ -- New Zealand dollar THB -- Thailand Baht
C$ -- Canadian dollar PHP -- Philippine peso (Pounds) -- British pound
MYR -- Malaysian Ringgit SG$ -- Singapore dollar US$ -- United States dollar
(b) Coupon changes periodically upon a predetermined schedule. Stated interest rate in effect
at October 31, 2001.
(c) Value of security is linked to the value of Government of Korea 7.70%, 8/16/03 and the
movement of the South Korean Won.
(d) Value of security is linked to the value of Korea Development Bank 7.01%, 6/26/02 and the
movement of the South Korean Won.
(e) Securities, or a portion thereof, pledged as collateral for the forward currency exchange
contracts.
(f) Forward foreign currency exchange contracts entered into as of October 31, 2001 were as
follows:
-------------------------------------------------------------------------------------
Purchases
Net Unrealized
Contracts to Receive In exchange for Settlement Date Value Depreciation
-------------------------------------------------------------------------------------
PHP 18,419,800 US$350,000 12/24/01 US$348,963 $(1,037)
=======
Aberdeen Commonwealth Income Fund, Inc. 19
Statement of Assets and Liabilities
October 31, 2001
Assets
Investments, at value (cost $132,014,309) ................................... $120,042,398
Foreign currency, at value (cost $1,015,464) ................................ 1,002,800
Cash ........................................................................ 806
Interest receivable ......................................................... 2,385,772
Prepaid expenses and other assets 42,267
-------------
Total assets ............................................................. 123,474,043
-------------
Liabilities
Dividends and distributions payable--common stock ........................... 648,635
Investment management fee payable ........................................... 71,636
Administration fee payable .................................................. 22,042
Dividends payable--preferred stock .......................................... 15,876
Net unrealized depreciation on forward foreign exchange contracts ........... 1,037
Accrued expenses and other liabilities ...................................... 175,660
-------------
Total liabilities ........................................................ 934,886
-------------
Total Net Assets ............................................................ $122,539,157
=============
Total net assets were composed of:
Common stock:
Par value ($.001 per share, applicable to 9,266,209 shares issued) ....... $ 9,266
Paid-in capital in excess of par ......................................... 122,910,705
Preferred stock ($.001 par value per share and $25,000 liquidation
value per share applicable to 1,200 shares) ................................. 30,000,000
-------------
152,919,971
Distributions in excess of investment income ................................ (664,511)
Accumulated net realized losses on investment transactions .................. (448,630)
Net unrealized appreciation on investments .................................. 706,495
Accumulated net realized foreign exchange losses ............................ (17,273,592)
Net unrealized foreign exchange losses ...................................... (12,700,576)
-------------
Total Net Assets ............................................................ $122,539,157
=============
Net assets applicable to common shareholders ................................ $ 92,539,157
=============
Net asset value per common share ($92,539,157/9,266,209 shares of
common stock issued and outstanding) ..................................... $ 9.99
=============
20 Aberdeen Commonwealth Income Fund, Inc.
Statement of Operations
For the Year Ended October 31, 2001
Net Investment Income
Income
Interest and discount earned (net of foreign withholding taxes of $ 170,270) ....... $ 8,548,715
-----------
Expenses
Investment management fee .......................................................... 807,872
Administration fee ................................................................. 248,576
Directors' fees and expenses ....................................................... 155,146
Reports to shareholders ............................................................ 132,678
Independent accountant's fees and expenses ......................................... 112,030
Legal fees and expenses ............................................................ 115,536
Custodian's fees and expenses ...................................................... 98,587
Insurance expense .................................................................. 79,451
Auction agent's fees and expenses .................................................. 79,325
Investor Relations fees and expenses ............................................... 73,568
Registration fees .................................................................. 23,528
Transfer agent's fees and expenses ................................................. 19,210
Miscellaneous ...................................................................... 39,213
-----------
Total operating expenses ......................................................... 1,984,720
-----------
Net investment income ................................................................. 6,563,995
-----------
Realized and Unrealized Gains (Losses) on Investments and
Foreign Currencies
Net realized losses on investment transactions ..................................... (420,172)
Net realized foreign exchange losses ............................................... (4,541,817)
-----------
(4,961,989)
-----------
Net change in unrealized appreciation of investments ............................... 3,076,210
Net change in unrealized foreign exchange losses ................................... 2,579,210
-----------
5,655,420
-----------
Net gain on investments and foreign currencies ........................................ 693,431
-----------
Net Increase in Net Assets Resulting from Operations .................................. $ 7,257,426
===========
Aberdeen Commonwealth Income Fund, Inc. 21
Statement of Cash Flows
For the Year Ended October 31, 2001
Increase (Decrease) in Cash (Including Foreign Currency)
Cash flows provided from operating activities
Interest received ....................................................................... $ 8,582,225
Operating expenses paid ................................................................. (2,036,684)
Purchases of short-term portfolio investments, net ...................................... (2,797,317)
Purchases of long-term portfolio investments ............................................ (23,504,577)
Proceeds from sales of long-term portfolio investments .................................. 29,790,107
Other ................................................................................... 20,212
------------
Net cash provided from operating activities ........................................... 10,053,966
------------
Cash flows used for financing activities
Dividends paid to common shareholders ................................................... (7,782,866)
Dividends paid to preferred shareholders ................................................ (1,413,792)
------------
Net cash used for financing activities ................................................ (9,196,658)
------------
Effect of exchange rate on cash ............................................................ (237,651)
------------
Net increase in cash ....................................................................... 619,657
Cash at beginning of year ............................................................... 383,949
------------
Cash at end of year ..................................................................... $ 1,003,606
============
Reconciliation of Net Increase in Net Assets from
Operations to Net Cash (Including Foreign Currency)
Provided from Operating Activities
Net increase in total net assets resulting from operations .............................. $ 7,257,426
------------
Decrease in investments ................................................................. 2,992,080
Net realized losses on investments ...................................................... 420,172
Net realized foreign exchange losses .................................................... 4,541,817
Increase in unrealized depreciation on forward foreign exchange contracts ............... 3,562
Net change in unrealized appreciation on investments .................................... (3,076,210)
Net change in unrealized foreign exchange losses ........................................ (2,579,210)
Decrease in interest receivable ......................................................... 414,550
Decrease in receivable for investments sold ............................................. 5,068,180
Net decrease in other assets ............................................................ 20,212
Decrease in payable for investments purchased ........................................... (4,956,649)
Decrease in accrued expenses and other liabilities ...................................... (51,964)
------------
Total adjustments ....................................................................... 2,796,540
------------
Net cash provided from operating activities ................................................ $ 10,053,966
============
22 Aberdeen Commonwealth Income Fund, Inc.
Statements of Changes in Net Assets
For the Year
Ended October 31,
----------------------------
2001 2000
----------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations
Net investment income .................................................. $ 6,563,995 $ 7,522,827
Net realized gains (losses) on investment transactions ................. (420,172) 2,020,497
Net realized gains on futures transactions ............................. -- 28,352
Net realized foreign exchange losses ................................... (4,541,817) (5,683,079)
Net change in unrealized appreciation/depreciation of investments ...... 3,076,210 (2,122,298)
Net change in unrealized foreign exchange losses ....................... 2,579,210 (9,888,532)
------------ ------------
Net increase (decrease) in net assets resulting from operations ........... 7,257,426 (8,122,233)
------------ ------------
Dividends and distributions to shareholders
Dividends to common shareholders from net investment income ............ (3,178,810) (6,591,924)
Dividends to preferred shareholders from net investment income ......... (1,429,668) (1,514,672)
Tax return of capital .................................................. (4,604,057) --
Distributions to common shareholders from net realized gains
on investment transactions ........................................... -- (1,468,931)
Distributions to preferred shareholders from net realized gains
on investment transactions ........................................... -- (312,268)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders .......................................... (9,212,535) (9,887,795)
------------ ------------
Total decrease in net assets .............................................. (1,955,109) (18,010,028)
Total Net Assets
Beginning of year ......................................................... 124,494,266 142,504,294
------------ ------------
End of year (including distributions in excess of net
investment income of ($664,511) and ($684,022),
respectively) .......................................................... $122,539,157 $124,494,266
============ ============
Aberdeen Commonwealth Income Fund, Inc. 23
Financial Highlights
For the Year Ended October 31,
---------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------
Per Share Operating Performance:
Net asset value per common share,
beginning of year ................................. $ 10.20 $ 12.14 $ 13.07 $ 13.94 $ 14.32
-------- -------- --------- --------- --------
Net investment income ................................ 0.71 0.81 0.87 0.99 1.14
Net realized and unrealized gains (losses)
on investments and foreign currencies ............. 0.07 (1.68) (0.70) (0.73) (0.34)
-------- -------- --------- --------- --------
Total from investment operations .................. 0.78 (0.87) 0.17 0.26 0.80
-------- -------- --------- --------- --------
Dividends from net investment income to
common shareholders ............................... (0.34) (0.71) (0.62) (0.87) (0.99)
Dividends from net investment income to
preferred shareholders ............................ (0.15) (0.16) (0.11) (0.14) (0.17)
Tax return of capital ................................ (0.50) -- -- -- --
Distributions from net realized gains on investment
transactions to common shareholders ............... -- (0.16) (0.33) (0.08) (0.02)
Distributions from net realized gains on investment
transactions to preferred shareholders ............ -- (0.04) (0.04) (0.04) --
-------- -------- --------- --------- --------
Total dividends and distributions ................. (0.99) (1.07) (1.10) (1.13) (1.18)
-------- -------- --------- --------- --------
Net asset value per common share, end of year ........ $ 9.99 $ 10.20 $ 12.14 $ 13.07 $ 13.94
======== ======== ========= ========= ========
Market value, end of year ............................ $ 9.00 $ 8.8750 $ 10.375 $ 10.8125 $12.4375
======== ======== ========= ========= ========
Number of shares of common stock
outstanding (000 omitted) ......................... 9,266 9,266 9,266 9,266 9,266
Total investment return based on:/(1)/
Market value ...................................... 11.20% (6.11)% 4.89% (5.59)% 13.78%
Net asset value ................................... 7.40% (7.78)% 1.53% 1.82% 5.76%
Ratio to Average Net Assets of Common
Shareholders/(2)/Supplementary Data:
Net assets of common shareholders, end of
period (000 omitted) .............................. $ 92,539 $ 94,494 $ 112,504 $ 121,096 $129,158
Average net assets of common shareholders
(000 omitted) ..................................... 93,987 105,657 119,257 122,266 130,125
Operating expenses ................................... 2.11% 2.02% 1.95% 1.70% 1.63%
Net investment income available to
common shareholders/(2)/ .......................... 5.46% 5.39% 5.53% 6.17% 6.88%
Portfolio turnover ................................... 17% 29% 40% 36% 24%
Senior securities (preferred stock)
outstanding (000 omitted) ......................... $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Asset coverage on preferred stock at year end ........ 408% 415% 475% 504% 530%
-----------------------------------------------------------------------------------------------------------
(1) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed for
the purposes of this calculation to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Total investment return does not
reflect brokerage commissions. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in years where there is an increase in the discount or a decrease in
the premium of the market value to the net asset value from the beginning to
the end of such years. Conversely, total investment return based on net
asset value will be lower than total investment return based on market value
in periods where there is a decrease in the discount or an increase in the
premium of the market value to the net asset value from the beginning to the
end of such years.
(2) Ratios are calculated on the basis of income and expenses applicable to both
the common and preferred shares relative to the average net assets of common
shareholders. Ratio of net investment income before preferred stock
dividends to average net assets of common shareholders is 6.98%, 7.12%,
6.76%, 7.50% and 8.10%, respectively.
24 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements
Note 1. Investment Objectives
Aberdeen Commonwealth Income Fund, Inc. (formerly known as The First
Commonwealth Fund, Inc.) (the "Fund") was incorporated in Maryland on June 28,
1991, as a closed-end, non-diversified investment company.
The Fund's principal investment objective is to provide high current income by
investing primarily in fixed-income securities denominated in Commonwealth
Currencies. As a secondary investment objective, the Fund seeks capital
appreciation, but only when consistent with its principal investment objective.
The Fund will seek to achieve its investment objective through investment in
securities denominated in the Commonwealth Currencies and in Global Debt
Securities. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic developments in a specific
industry, country or region.
Note 2. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Basis of Presentation: The financial statements of the Fund are prepared in
accordance with accounting principles generally accepted in the United States of
America using the United States dollar as both the functional and reporting
currency. However, the Commonwealth Currencies (excluding New Zealand) are the
functional currencies for Federal tax purposes (see Taxes below).
Foreign Currency Translation: Foreign currency amounts are translated into
United States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities -- at
the closing rates of exchange as reported by a major bank;
(ii) purchases and sales of investment securities, income and expenses -- at the
rates of exchange prevailing on the respective dates of such transactions.
The Fund isolates that portion of the results of operations arising as a result
of changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at fiscal period end.
Similarly, the Fund isolates the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of portfolio
securities sold during the fiscal year.
Aberdeen Commonwealth Income Fund, Inc. 25
Notes to Financial Statements (continued)
Net realized foreign exchange losses includes realized foreign exchange gains
and losses from sales and maturities of portfolio securities, sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the amounts of
interest, discount and foreign withholding taxes recorded on the Fund's books
and the U.S. dollar equivalent amounts actually received or paid. Net unrealized
foreign exchange gains include changes in the value of portfolio securities and
other assets and liabilities arising as a result of changes in the exchange
rate. Accumulated realized and unrealized foreign exchange losses shown in the
composition of net assets represent foreign exchange losses for book purposes
that have not yet been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the US
dollar.
The exchange rates of the Commonwealth Currencies utilized by the Fund at
October 31, 2001 were US$0.50 to A$1.00, US$0.63 to C$1.00, US$0.41 to NZ$1.00,
US$1.45 to (Pounds)1.00.
Security Valuation: Investments are stated at value. Investments for which
market quotations are readily available are valued at the last trade price on or
within one local business day of the date of determination as obtained from a
pricing source. If no such trade price is available, such investments are valued
at the quoted bid price or the mean between the quoted bid and asked price on
the date of determination as obtained from a pricing source. Securities for
which market quotations are not readily available are valued at fair value in
good faith using methods determined by or under the direction of the Fund's
Board of Directors.
Securities purchased with a maturity of less than 60 days are valued at
amortized cost. Securities purchased with a maturity of greater than 60 days are
valued at current market quotations until the 60th day prior to maturity. At
that time, the value of the security on the 61st day prior to maturity is
amortized on a straight-line basis to value the security for the remaining 60
days.
26 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements (continued)
Repurchase Agreements: In connection with transactions in repurchase agreements
with US financial institutions, it is the Fund's policy that its
custodian/counterparty segregates the underlying collateral securities, the
value of which exceeds the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the collateral is valued on a daily basis to determine
its adequacy. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income is recorded on an accrual basis. Discounts on securities
purchased are accreted on an effective yield basis over the estimated lives of
the respective securities. Expenses are accrued on a daily basis.
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies, was issued, and is effective for fiscal years beginning
after December 15, 2000. The revised Guide will require the Fund to amortize
premium on all fixed-income securities. Upon initial adoption, the Fund will be
required to adjust the cost of its fixed-income securities by the cumulative
amount of amortization that would have been recognized had amortization been in
effect from the purchase date of each holding. Adopting this accounting
principle will not affect the Fund's net asset value, but will change the
classification of certain amounts between interest income and realized and
unrealized gain/loss in the Statement of Operations. The initial adjustment
required upon adoption of premium and discount amortization will decrease the
recorded costs of its investments (but not their market value) by $3,549,925.
Additionally, had this principle been in effect during the year ended October
31, 2001, the Fund estimates that net investment income would have decreased by
approximately $0.11 per share (1.1% of net assets) and realized and unrealized
gain (loss) per share would have increased (decreased) by the same amount.
Because the Fund determines its required
Aberdeen Commonwealth Income Fund, Inc. 27
Notes to Financial Statements (continued)
distributions under Federal income tax laws, adoption of this principle will not
affect the amount or composition of distributions paid to shareholders.
Derivative Financial Instruments:
The Fund is authorized to use derivatives to manage both currency and interest
rate risk for global debt securities. With respect to investments denominated in
Commonwealth currencies, derivatives can only be used to manage interest rate
risk. Losses may arise due to changes in the value of the contract if the
counter-party does not perform under the contract.
Forward Currency Contracts: A forward currency contract involves an obligation
to purchase and sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. The foreign currency contract is
marked-to-market daily and the change in market value is recorded by the Fund as
an unrealized gain or loss. When the forward currency contract is closed, the
Fund records a realized gain or loss equal to the difference between the value
at the time it was opened and the value at the time it was closed.
Financial futures contracts: A futures contract is an agreement between two
parties to buy and sell a security for a set price on a future date. Upon
entering into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in the value of the contract.
Such receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of October 31, 2001, there were no open futures contracts.
Options: When the fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written. When a security is purchased or sold through an
exercise of an option, the related
28 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements (continued)
premium paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the security
sold. When an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received). As of October 31, 2001,
there were no open option contracts.
Dividends: Dividends and distributions to common shareholders are recorded on
the ex-dividend date. These are based upon net investment income, capital and
currency gains and, to the extent necessary, return of capital. This is
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States of America. These
differences are primarily due to differing treatments for foreign currencies
and loss deferrals. Dividends and distributions to preferred shareholders are
accrued on a daily basis and are determined as described in Note 5.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with AICPA Statement of Position
93-2 Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. For
the year ended October 31, 2001, the Fund decreased distributions in excess of
net investment income by $2,668,051, increased accumulated net realized losses
on investments by $342,342 and decreased accumulated net realized foreign
exchange losses by $2,417,202, resulting in a decrease to paid-in capital in
excess of par by $4,742,911. Net investment income, net realized losses on
investments and net assets were not affected by this change.
Taxes: For Federal income and excise tax purposes, substantially all of the
Fund's transactions are accounted for using the functional currencies.
Accordingly, only realized currency gains and losses resulting from the
repatriation of any of the Commonwealth Currencies into US dollars or another
Commonwealth Currency and realized currency gains and losses on non-Commonwealth
currencies are recognized for tax purposes.
No provision has been made for United States of America Federal income taxes
because it is the Fund's policy to meet the requirements of the United States
of America Internal Revenue Code applicable
Aberdeen Commonwealth Income Fund, Inc. 29
Notes to Financial Statements (continued)
to regulated investment companies and to distribute substantially all of its
taxable income to shareholders. Under the applicable foreign tax law, a
withholding tax may be imposed on interest and discounts earned at various
rates.
Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and net realized gains on investment and currency
transactions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statements of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash includes domestic and foreign
currency.
Use of Estimates: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Note 3. Agreements
The Fund has agreements with Aberdeen Asset Managers (C.I.) Limited (formerly
known as EquitiLink International Management Limited) (the "Investment
Manager"), Aberdeen Asset Management Limited (formerly known as EquitiLink
Australia Limited) (the "Investment Adviser"), and Princeton Administrators,
L.P. (the "Administrator"). The Investment Manager and the Investment Adviser
are wholly-owned subsidiaries of Aberdeen Asset Management Plc. The Investment
Manager has entered into an agreement with CIBC World Markets, Inc. (the
"Consultant").
The Investment Manager makes investment decisions on behalf of the Fund on the
basis of recommendations and information furnished to it by the Investment
Adviser and the Consultant, including the selection of and the placement of
orders with brokers and dealers to execute portfolio transactions on behalf of
the Fund.
The management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 0.65% of the Fund's
average weekly net assets up to $200 million, 0.60% of such assets between $200
million and $500 million and 0.55% of such assets in excess of $500 million. The
administration agreement provides the Administrator with a fee computed and
payable monthly at the annual rate of 0.20% of the Fund's
30 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements (continued)
average weekly net assets, subject to a minimum annual payment of $150,000
($12,500 per month). The Investment Manager pays fees to the Investment Adviser
and the Consultant for their services rendered.
The Investment Manager informed the Fund that it paid $306,388 to the Investment
Adviser and $12,000 to the Consultant during the year ended October 31, 2001.
Effective March 1, 2000, the Fund entered into an agreement with EquitiLink USA,
Inc. (doing business under the name Aberdeen Asset Management ("AAM")), a
wholly-owned subsidiary of Aberdeen Asset Managers (C.I.) Limited, to provide
investor relations services. This agreement provides AAM with a monthly retainer
of $4,000 plus out of pocket expenses. For the year ended October 31, 2001, the
Fund paid AAM $55,747.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended October 31, 2001 aggregated $18,547,928 and $24,718,365,
respectively.
The United States of America federal income tax basis of the Fund's investments
at October 31, 2001 was $119,355,870 and accordingly, net unrealized
appreciation for United States federal income tax purposes was $686,528 (gross
unrealized appreciation -- $3,078,234, gross unrealized depreciation
--$2,391,706.)
For federal income tax purposes, the Fund had a capital loss carryforward as of
October 31, 2001 of approximately $428,662 which expires in 2009. Accordingly,
no capital gains distributions are expected to be paid to shareholders until
future net gains have been realized in excess of such carryforward.
Note 5. Capital
There are 300 million shares of $.001 par value common stock authorized and
9,266,209 shares outstanding at October 31, 2001.
On March 1, 2001, the Board of Directors approved a stock repurchase program.
The stock repurchase program allows the Fund to repurchase up to 10% of its
outstanding common stock in the open market during any 12-month period, if and
when the discount to net asset value is at least 10%. Through October 31, 2001,
Aberdeen Commonwealth Income Fund, Inc. 31
Notes to Financial Statements (concluded)
there have been no share repurchases through this program.
There are 100 million shares of $.001 par value of Auction Market Preferred
Stock ("Preferred Stock") authorized. The preferred shares have rights as
determined by the Board of Directors. The 1,200 shares of Preferred Stock
outstanding consist of one series, W-7. The Preferred Stock has a liquidation
value of $25,000 per share plus any accumulated but unpaid dividends whether or
not declared.
Dividends on the Preferred Stock are cumulative at a rate typically reset every
seven days based on the results of an auction. Dividend rates ranged from 2.760%
to 6.634% during the year ended October 31, 2001. Under the Investment Company
Act of 1940, the Fund may not declare dividends or make other distributions on
shares of common stock or purchase any such shares if, at the time of the
declaration, distribution or purchase, asset coverage with respect to the
outstanding Preferred Stock would be less than 200%.
The Preferred Stock is redeemable at the option of the Fund, in whole or in
part, on any dividend payment date at $25,000 per share plus any accumulated but
unpaid dividends. The Preferred Stock is also subject to mandatory redemption at
$25,000 per share plus any accumulated but unpaid dividends, whether or not
declared, if certain requirements relating to the composition of the assets and
liabilities of the Fund as set forth in the Articles of Incorporation are not
satisfied.
The holders of Preferred Stock have voting rights equal to the holders of common
stock (one vote per share) and will vote together with holders of shares of
common stock as a single class. However, holders of Preferred Stock are also
entitled to elect two of the Fund's directors.
Note 6. Subsequent Dividends
Subsequent to October 31, 2001, the Board of Directors of the Fund declared a
distribution of $ 0.07 per common share payable on December 14, 2001 to common
shareholders of record on November 30, 2001.
Subsequent to October 31, 2001, dividends and distributions declared and paid on
preferred shares totaled approximately $86,112 for the outstanding preferred
share series through December 13, 2001.
32 Aberdeen Commonwealth Income Fund, Inc.
Report of Independent Accountants
To the Shareholders and the Board of Directors of
Aberdeen Commonwealth Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of Aberdeen Commonwealth Income
Fund, Inc. (the "Fund," formerly known as The First Commonwealth Fund, Inc.) at
October 31, 2001, the results of its operations and its cash flows for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2001 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 13, 2001
Aberdeen Commonwealth Income Fund, Inc. 33
Portfolio of Investments (unaudited)
As of April 30, 2002
Principal
Amount
Local
Currency(a) Value
(000) Description (US$)
-------------------------------------------------------------------
LONG-TERM INVESTMENTS -- 107.0%
AUSTRALIA -- 26.6%
Government Bonds -- 7.9%
A$
Commonwealth of Australia,
3,000 10.00%, 10/15/02 ......................... 1,650,634
2,000 9.50%, 8/15/03 ........................... 1,132,994
1,000 10.00%, 10/15/07 ......................... 640,812
500 8.75%, 8/15/08 ........................... 307,762
2,500 7.50%, 9/15/09 ........................... 1,458,050
1,500 6.50%, 5/15/13 ........................... 823,937
Federal National Mortgage
Association, Series EMTN,
2,000 6.375%, 8/15/07 .......................... 1,083,009
-----------
Total government bonds
(cost US$8,211,062) ...................... 7,097,198
-----------
Semi-Government Bonds -- 12.3%
New South Wales -- 3.6%
New South Wales Treasury Corporation,
1,500 7.00%, 4/01/04 ............................ 828,087
4,200 7.00%, 12/01/10 ........................... 2,347,420
-----------
3,175,507
-----------
Queensland -- 4.4%
Queensland Treasury Corporation,
2,000 8.00%, 5/14/03 (Global) .................. 1,106,112
1,000 8.00%, 9/14/07 (Global) .................. 585,928
3,000 6.00%, 6/14/11 ........................... 1,571,228
1,250 6.00%, 6/14/21 ........................... 629,532
-----------
3,892,800
-----------
Victoria -- 2.0%
State Electricity Commission of
Victoria,
535 10.50%, 5/27/03 .......................... 303,059
Treasury Corporation of Victoria,
1,000 9.00%, 6/27/05 ........................... 583,202
1,500 10.25%, 11/15/06 ......................... 939,516
-----------
1,825,777
-----------
Western Australia -- 2.3%
A$
Western Australia Treasury Corporation,
3,500 8.00%, 6/15/13 ........................... 2,097,785
-----------
Total Australian
semi-government bonds
(cost US$11,942,572 ...................... 10,991,869
-----------
Supranational -- 2.4%
Eurofima,
3,500 9.875%, 1/17/07 .......................... 2,172,296
-----------
Total Australian dollar supranational
bonds
(cost US$1,397,461) ...................... 2,172,296
-----------
Utilities -- 1.2%
Telstra Corp.,
2,000 11.50%, 10/15/02 ......................... 1,105,259
-----------
Total Australian utility bonds
(cost US$1,397,461) ...................... 1,105,259
-----------
Corporate Non-Banks -- 2.8%
Brisbane Airport
Corporation, Ltd.,
4,000 7.30%, 6/30/10 ........................... 2,219,872
GE Capital
Australia,
600 6.75%, 9/15/07 ........................... 326,186
-----------
Total Australian corporate
non-bank bonds
(cost US$2,501,827) ...................... 2,546,058
-----------
Total Australian
long-term investments
(cost US$26,182,633) ..................... 23,912,680
-----------
14 Aberdeen Commonwealth Income Fund, Inc.
Portfolio of Investments (unaudited) (continued)
As of April 30, 2002
Principal
Amount
Local
Currency (a) Value
(000) Description (US$)
-----------------------------------------------------------
CANADA -- 25.2%
Government Bonds -- 16.8%
C$
Canadian Government,
2,500 7.25%, 6/01/07 ................... 1,737,530
3,000 10.25%, 3/15/14 .................. 2,651,742
4,000 8.00%, 6/01/23 ................... 3,171,740
8,000 9.00%, 6/01/25 ................... 7,018,360
Canada (Cayman),
750 7.25%, 6/01/08 ................... 515,799
-------------
Total Canadian
government bonds
(cost US$16,354,692 .............. 15,095,171
------------
Semi-Government Bonds -- 7.3%
British Columbia -- 1.8%
Province of British Columbia,
2,000 9.50%, 1/09/12 ................... 1,605,160
------------
Ontario -- 1.2%
Ontario Hydro,
500 8.50%, 5/26/25 ................... 400,182
Province of Ontario,
1,000 8.75%, 4/22/03 ................... 669,752
------------
1,069,934
------------
Quebec -- 3.8%
Quebec Hydro,
1,500 7.00%, 6/01/04 ................... 1,006,541
1,000 2.857%, 1/28/05(b) ............... 641,345
2,000 9.625%, 7/15/22 ................... 1,730,607
-------------
3,378,493
-------------
Toronto -- 0.5%
Metropolitan Municipality
of Toronto,
750 9.625%, 5/14/02 .................. 478,824
-------------
Total Canadian
semi-government bonds
(cost US$7,009,899) .............. 6,532,411
-------------
Utilities -- 0.4%
C$
Bell TelephoneCompany
of Canada,
500 10.50%, 7/15/09 .................. 326,438
-------------
Total Canadian utility bonds
(cost US$428,832) ................ 326,438
-------------
Banking and Finance -- 0.7%
Credit Local de France,
1,000 6.75%, 3/21/06 ................... 667,479
-------------
Total Canadian banking
and finance bonds
(cost US$710,755) ................ 667,479
-------------
Total Canadian
long-term investments
(cost US$24,504,178) ............. 22,621,499
-------------
MALAYSIA -- 0.9%
Semi-Government Bonds -- 0.9%
MYR
Danamodal Nasional Berhad,
3,100 0.00%, 10/21/03 .................. 780,466
-------------
Total Malaysia
long-term investments
(cost US$758,664) ................ 780,466
-------------
NEW ZEALAND -- 11.6%
Government Bonds -- 0.5%
NZ$
Canadian Government,
1,000 6.625%, 10/03/07 ................. 439,182
-------------
Total New Zealand
government bonds
(cost US$553,653) ................ 439,182
-------------
Utilities -- 1.0%
Electricity Corporation of
New Zealand Ltd.,
1,000 8.00%, 2/15/03 ................... 453,519
TCNZ Finance Limited,
1,000 9.25%, 7/01/02 ................... 449,401
-------------
Total New Zealand
utility bonds
(cost US$1,150,172) .............. 902,920
-------------
Aberdeen Commonwealth Income Fund, Inc. 15
Portfolio of Investments (unaudited) (continued)
As of April 30, 2002
Principal
Amount
Local
Currency(a) Value
(000) Description (US$)
-------------------------------------------------
Banking and Finance -- 9.3%
NZ$
Bayerische Hypo- und
Vereinsbank AG,
2,000 7.00%, 9/14/05 ............. 892,279
Commerzbank AG,
3,500 8.00%, 2/07/05 ............. 1,600,939
Landesbank
Baden-Wuerttemberg,
6,500 5.25%, 1/06/05 ............. 2,800,021
Landesbank Hessen-
Thueringen Girozentrale,
4,000 7.00%, 12/17/07 ............ 1,779,994
Transpower Finance Ltd.,
500 8.00%, 6/15/05 ............. 230,020
WestPac Trust Securities
2,500 6.00%, 4/28/04 ............. 1,102,528
-----------
Total New Zealand
banking and finance bonds
(cost US$8,271,258) ........ 8,405,781
-----------
Corporate Non-Banks -- 0.8%
Housing New Zealand,
1,500 8.00%, 11/15/06 ............ 696,663
-----------
Total New Zealand
corporate non-bank bonds
(cost US$797,822) .......... 696,663
-----------
Total New Zealand
long-term investments
(cost US$10,772,905) ....... 10,444,546
-----------
PHILIPPINES -- 0.2%
Government Bonds -- 0.2%
PHP
Philippine Government,
7,000 16.50%, 2/25/09 ............ 165,081
-----------
Total Philippine
long-term investments
(cost US$201,468) .......... 165,081
-----------
SINGAPORE -- 0.7%
Government bonds -- 0.5%
SG$
Singapore Government,
100 3.00%, 11/01/02 ............ 55,729
50 4.00%, 3/01/07 ............. 28,893
700 4.625%, 7/01/10 ............ 408,641
-----------
Total Singapore
government bonds
(cost US$502,841) .......... 493,263
-----------
Utilities -- 0.2%
Singapore Power,
250 4.60%, 9/21/07 ............. 145,595
-----------
Total Singapore corporate
non-bank bonds
(cost US$143,812) .......... 145,595
-----------
Total Singapore
long-term investments
(cost US$646,653) .......... 638,858
-----------
SOUTH KOREA -- 4.1%
Government Bonds -- 1.8%
US$
EMBARC Ltd. Linked Note
Series 1-9,
2,000 5.523%, 8/18/03 (b)(c) ..... 1,601,320
-----------
Government Banks -- 2.3%
EMBARC Ltd. Linked Note
Series 1-7,
2,600 4.953%, 6/28/02 (b)(d) ..... 2,026,882
-----------
Total Korean
long-term investments
(cost US$4,404,297) ........ 3,628,202
-----------
THAILAND -- 0.6%
Government Bonds -- 0.4%
THB
Thailand Government,
550 8.25%, 10/14/03 (e) ........ 13,788
12,000 8.00%, 12/08/06 (e) ........ 328,890
-----------
Total Thailand
government bonds
(cost US$342,477) .......... 342,678
-----------
16 Aberdeen Commonwealth Income Fund, Inc.
Portfolio of Investments (unaudited) (continued)
As of April 30, 2002
Principal
Amount
Local
Currency (a) Value
(000) Description (US$)
-----------------------------------------------------------
Utilities -- 0.1%
THB
Eastern Water Resources
Development and Management
Company Limited,
5,000 9.00%, 7/22/04 (e).................. 128,563
-----------
Total Thailand utility bonds
(cost US$127,001)................... 128,563
-----------
Corporate Non-Banks -- 0.1%
Advanced Info Service
Public Company Limited,
2,600 6.50%, 3/20/03 (e)................ 61,996
-------------
Total Thailand corporate
non-bank bonds
(cost US$68,911).................. 61,996
-------------
Total Thailand
long-term investments
(cost US$538,389)................. 533,237
-------------
UNITED KINGDOM -- 36.1%
Government Bonds -- 27.7%
(Pounds)
United Kingdom Treasury,
1,500 8.00%, 6/10/03 ................... 2,267,440
500 5.00%, 6/07/04 ................... 731,326
1,250 8.50%, 12/07/05 .................. 2,022,127
1,100 7.50%, 12/07/06 .................. 1,751,310
500 5.75%, 12/07/09 .................. 752,258
1,500 8.00%, 9/27/13 ................... 2,690,813
600 8.00%, 12/07/15 .................. 1,109,075
3,000 8.00%, 6/07/21 ................... 5,874,561
2,350 6.00%, 12/07/28 .................. 3,908,429
Republic of Finland,
1,000 8.00%, 4/07/03 ................... 1,495,904
1,250 10.125%, 6/22/08 ................. 2,225,510
-------------
Total United Kingdom
government bonds
(cost US$27,188,019) ............. 24,828,753
-------------
Utilities -- 2.6%
British Gas PLC,
1,400 8.875%, 7/08/08 .................. 2,335,501
-------------
Total United Kingdom
utility bonds
(cost US$2,201,821) .............. 2,335,501
-------------
Banking and Finance -- 5.8%
(Pounds)
Abbey National Treasury
Services PLC,
1,250 8.00%, 4/02/03 ................... 1,867,984
Barclays Bank PLC,
1,000 9.875%, 5/29/49 .................. 1,731,943
Lloyds Bank PLC,
500 7.375%, 3/11/04 .................. 752,838
Prudential Finance B.V.,
500 9.375%, 6/04/07 .................. 840,523
-------------
Total United Kingdom
banking and finance bonds
(cost US$5,046,140) .............. 5,193,288
-------------
Total United Kingdom
long-term investments
(cost US$34,435,980) ............. 32,357,542
-------------
UNITED STATES -- 1.0%
Yankee Bonds -- 1.0%
US$
AES China Generating
Company,
100 10.125%, 12/15/06 ................ 91,500
Cable & Wireless
Optus Finance,
100 8.00%, 6/22/10 ................... 111,423
CNOOC Finance Ltd.,
50 6.375%, 3/08/12 .................. 49,798
Korea Development Bank
200 5.25%, 11/16/06 .................. 200,729
Malaysia Government,
50 7.50%, 7/15/11 ................... 53,095
PCCW-HKTC Capital Ltd.,
200 7.75%, 11/15/11 .................. 199,991
Republic of Philippines,
50 8.375%, 3/12/09 .................. 50,923
50 9.375%, 1/18/17 .................. 52,375
100 9.875%, 1/15/19 .................. 104,367
-------------
Total United States
long-term bonds
(cost US$887,322) ................ 914,201
-------------
Total long-term investments
(cost US$103,332,489) ........... . 95,996,312
-------------
Aberdeen Commonwealth Income Fund, Inc. 17
Portfolio of Investments (unaudited) (concluded)
As of April 30, 2002
Principal
Amount
Local
Currency (a) Value
(000) Description (US$)
---------------------------------------------------
SHORT-TERM INVESTMENTS -- 25.0%
Australia -- 5.0%
A$
Banque Nationale de Paris
Fixed Deposit,
8,303 4.00%, 5/01/02
(cost US$4,458,545) ....... 4,458,544
-----------
Canada -- 3.6%
C$
State Street Bank and
Trust Company Time Deposit,
2,572 1.75%, 5/01/02 ............. 1,638,530
2,544 1.75%, 5/08/02 ............. 1,620,692
-----------
(cost US$3,253,811) ........ 3,259,222
-----------
New Zealand -- 2.2%
NZ$
State Street Bank and
Trust Company Fixed Deposit
4,338 4.25%, 5/08/02
(cost US$1,941,255) ........ 1,941,255
-----------
United Kingdom -- 4.0%
(Pounds)
State Street Bank and
Trust Company Fixed Deposit
2,439 3.875%, 5/01/02
(cost US$3,533,623)......... 3,554,355
-----------
United States -- 10.2%
US$
9,167 Repurchase Agreement, State
Street Bank and Trust
Company, 1.77% dated
4/30/02, due 5/01/02 in the
amount of $9,167,451
(collateralized by $8,995,000
U.S.Treasury Notes, 5.625%
due 5/15/08; value
$9,354,800)
(cost US$9,167,000)......... 9,167,000
-----------
Total short-term investments
(cost US$22,354,234) ....... 22,380,376
-----------
-----------------------------------------------------------------------------------------------------
Total Investments-- 132.0% (cost US$125,686,723) 118,376,688
Net unrealized appreciation on forward foreign currency exchange contracts-- 0.0% (f) 2,586
Other assets in excess of liabilities-- 1.5% 1,404,884
Liquidation value of preferred stock-- (33.5%) (30,000,000)
-----------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shareholders-- 100.0% $ 89,784,158
-----------------------------------------------------------------------------------------------------
(a) Portfolio securities are listed based on currency in which they are traded;
A$ -- Australian dollar NZ$ -- New Zealand dollar THB -- Thailand Baht
C$ -- Canadian dollar PHP -- Philippine peso (Pounds) -- British pound
MYR -- Malaysian Ringgit SG$ -- Singapore dollar US$ -- United States dollar
(b) Coupon changes periodically upon a predetermined schedule. Stated interest
rate in effect at April 30, 2002.
(c) Value of security is linked to the value of Government of Korea 7.70%,
8/16/03 and the movement of the South Korean Won.
(d) Value of security is linked to the value of Korea Development Bank 7.01%,
6/26/02 and the movement of the South Korean Won.
(e) Securities, or a portion thereof, pledged as collateral for forward currency
exchange contracts.
(f) Forward foreign currency exchange contracts entered into as of April 30,
2002 were as follows:
-----------------------------------------------------------------------------------------
Purchases
Unrealized
Contracts to Receive In exchange for Settlement Date Value Appreciation
-----------------------------------------------------------------------------------------
CNY 828,800 US $100,000 07/24/02 US $100,064 $ 64
PHP 34,897,600 US $680,000 07/29/02 US $682,321 2,321
TWD 7,874,630 US $227,000 07/25/02 US $227,201 201
------
$2,586
======
18 Aberdeen Commonwealth Income Fund, Inc.
Statement of Assets and Liabilities (unaudited)
April 30, 2002
Assets
Investments, at value (cost $125,686,723) .................................... $ 118,376,688
Foreign currency, at value (cost $3,097,639) ................................. 3,123,663
Cash ......................................................................... 112,287
Interest receivable .......................................................... 2,465,958
Net unrealized appreciation on forward foreign exchange contracts ............ 2,586
Prepaid expenses ............................................................. 12,700
-------------
Total assets .............................................................. 124,093,882
-------------
Liabilities
Payable for investments purchased ............................................ 3,452,221
Dividends and distributions payable--common stock ............................ 555,973
Investment management fee payable ............................................ 68,093
Administration fee payable ................................................... 20,952
Accrued expenses and other liabilities ....................................... 212,485
-------------
Total liabilities ......................................................... 4,309,724
-------------
Preferred Stock
$.001 par value per share and $25,000 liquidation value per share ............ 30,000,000
-------------
Net Assets Applicable to Common Shareholders ................................. $ 89,784,158
=============
Composition of Net Assets Applicable to Common Shareholders
Common stock (par value $.001 per share) ..................................... $ 9,266
Paid-in capital in excess of par ............................................. 122,910,705
Distributions in excess of investment income ................................. (5,652,726)
Accumulated net realized losses on investment transactions ................... (283,097)
Net unrealized depreciation on investments ................................... (440,797)
Accumulated net realized foreign exchange losses ............................. (19,963,767)
Net unrealized foreign exchange losses ....................................... (6,795,426)
-------------
Net Assets Applicable to Common Shareholders ................................. $ 89,784,158
=============
Net asset value per common share based on (9,266,209 shares
issued and outstanding) ................................................... $ 9.69
=============
Aberdeen Commonwealth Income Fund, Inc. 19
Statement of Operations (unaudited)
For the Six Months Ended April 30, 2002
Net Investment Income
Income
Interest and discount earned (net of foreign withholding taxes of $66,111) .. $ 3,327,495
------------
Expenses
Investment management fee ................................................... 385,889
Administration fee .......................................................... 118,735
Directors' fees and expenses ................................................ 83,071
Reports to shareholders ..................................................... 74,713
Independent accountant's fees and expenses .................................. 57,962
Custodian's fees and expenses ............................................... 48,338
Auction agent's fees and expenses ........................................... 38,075
Legal fees and expenses ..................................................... 33,517
Investor relations fees and expenses ........................................ 30,313
Insurance expense ........................................................... 26,481
Registration fees ........................................................... 12,397
Transfer agent's fees and expenses .......................................... 10,339
Miscellaneous ............................................................... 17,639
------------
Total operating expenses .................................................. 937,469
------------
Net investment income .......................................................... 2,390,026
------------
Realized and Unrealized Gains (Losses) on Investments and
Foreign Currencies
Net realized gains on investment transactions ............................... 165,533
Net realized foreign exchange losses ........................................ (2,690,175)
------------
(2,524,642)
------------
Net change in unrealized depreciation of investments ........................ (4,288,434)
Net change in unrealized foreign exchange losses ............................ 5,496,367
------------
1,207,933
------------
Net loss on investments and foreign currencies ................................. (1,316,709)
------------
Net increase in Net Assets from Operations ..................................... 1,070,317
------------
Dividends to Shareholders from Net Investment Income
Preferred Stock ............................................................. (307,524)
------------
Net Increase in Net Assets Applicable to Common Shareholders
Resulting from Operations ...................................................... $ 765,793
============
20 Aberdeen Commonwealth Income Fund, Inc.
Statement of Cash Flows (unaudited)
For the Six Months Ended April 30, 2002
Increase (Decrease) in Cash (Including Foreign Currency)
Cash flows provided from operating activities
Interest received ..................................................................................... $ 3,571,389
Operating expenses paid ............................................................................... (905,277)
Purchases of short-term portfolio investments, net .................................................... (7,466,944)
Purchases of long-term portfolio investments .......................................................... (7,831,065)
Proceeds from sales of long-term portfolio investments ................................................ 18,711,105
Dividends paid to preferred shareholders .............................................................. (323,400)
Other ................................................................................................. 29,567
------------
Net cash provided from operating activities ......................................................... 5,785,375
------------
Cash flows used for financing activities
Dividends paid to common shareholders ................................................................. (3,613,454)
------------
Net cash used for financing activities .............................................................. (3,613,454)
------------
Effect of exchange rate on cash .......................................................................... 60,423
------------
Net increase in cash ..................................................................................... 2,232,344
Cash at beginning of period ........................................................................... 1,003,606
------------
Cash at end of period ................................................................................. $ 3,235,950
============
Reconciliation of Net Increase in Net Assets Applicable to Common Shareholders from Operations to
Net Cash (Including Foreign Currency) Provided from Operating Activities
Net increase in net assets applicable to common shareholders resulting from operations ................ $ 765,793
------------
Decrease in investments ............................................................................... 231,283
Net realized gains on investments ..................................................................... (165,533)
Net realized foreign exchange losses .................................................................. 2,690,175
Net change in unrealized appreciation/depreciation on investments ..................................... 4,288,434
Net change in unrealized foreign exchange losses ...................................................... (5,496,367)
Increase in interest receivable ....................................................................... (26,514)
Net decrease in other assets .......................................................................... 29,567
Increase in payable for investments purchased ......................................................... 3,452,221
Decrease in payable for preferred dividends ........................................................... (15,876)
Increase in accrued expenses and other liabilities .................................................... 32,192
------------
Total adjustments ..................................................................................... 5,019,582
------------
Net cash provided from operating activities .............................................................. $ 5,785,375
============
Aberdeen Commonwealth Income Fund, Inc. 21
Statements of Changes in Net Assets
For the Six
Months Ended For the Year
April 30, 2002 Ended
(unaudited) Oct. 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Applicable to Common Shareholders
Operations
Net investment income ................................................................... $ 2,390,026 $ 6,563,995
Net realized gains (losses) on investment transactions .................................. 165,533 (420,172)
Net realized foreign exchange losses .................................................... (2,690,175) (4,541,817)
Net change in unrealized appreciation/depreciation of investments ....................... (4,288,434) 3,076,210
Net change in unrealized foreign exchange gains/losses .................................. 5,496,367 2,579,210
------------ ------------
Net Increase in Net Assets from Operations .............................................. 1,070,317 7,257,426
------------ ------------
Dividends to shareholders from net investment income
Preferred stock ......................................................................... (307,524) (1,429,668)
------------ ------------
Net Increase in Net Assets Applicable to Common Shareholders Resulting from Operations ..... 765,793 5,827,758
------------ ------------
Dividends and distributions to common shareholders from net investment income ........... (3,520,792) (3,178,810)
Tax return of capital ................................................................... -- (4,604,057)
------------ ------------
Net decrease in net assets applicable to common shareholders resulting from
dividends and distributions ............................................................. (3,520,792) (7,782,867)
------------ ------------
Total decrease in net assets applicable to common shareholders ............................. (2,754,999) (1,955,109)
Net Assets Applicable to Common Shareholders
Beginning of period ........................................................................ 92,539,157 94,494,266
------------ ------------
End of period (including distributions in excess of net investment income of
($5,652,726) and ($664,511), respectively) .............................................. $ 89,784,158 $ 92,539,157
============ ============
22 Aberdeen Commonwealth Income Fund, Inc.
Financial Highlights
For the Six
Months Ended For the Year Ended
April 30, 2002 October 31,
------------------------
(unaudited)/(1)/ 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value per common share, beginning of period .............................. $ 9.99 $ 10.20 $ 12.14
---------- --------- ----------
Net investment income .............................................................. 0.26 0.71 0.81
Net realized and unrealized gains (losses) on investments and foreign currencies ... (0.15) 0.07 (1.68)
Dividends to preferred shareholders:
From net investment income ....................................................... (0.03) (0.15) (0.16)
From net realized gains on investment transactions ............................... -- -- (0.04)
---------- --------- ----------
Total from investment operations applicable to common shareholders ............... 0.08 0.63 (1.07)
---------- --------- ----------
Dividends and distributions to common shareholders:
From net investment income ....................................................... (0.38) (0.34) (0.71)
Tax return of Capital ............................................................ -- (0.50) --
From net realized gains on investment transactions ............................... -- -- (0.16)
---------- --------- ----------
Total dividends and distributions ................................................ (0.38) (0.84) (0.87)
---------- --------- ----------
Net asset value per common share, end of period .................................... $ 9.69 $ 9.99 $ 10.20
========== ========= ==========
Market value, end of period ........................................................ $ 8.85 $ 9.00 $ 8.8750
========== ========= ==========
Number of shares of common stock outstanding (000 omitted) ......................... 9,266 9,266 9,266
Total investment return based on:/(2)/
Market value ..................................................................... 3.46% 11.20% (6.11)%
Net asset value .................................................................. 1.64% 7.40% (7.78)%
Ratio to Average Net Assets Applicable to Common
Shareholders/(3)//Supplementary Data:
Net assets of common shareholders, end of period (000 omitted) ..................... $ 89,784 $ 92,539 $ 94,494
Average net assets of common shareholders (000 omitted) ............................ 89,432 93,987 105,657
Operating expenses ................................................................. 2.10% 2.11% 2.02%
Net investment income/(3)/.......................................................... 4.66% 5.46% 5.39%
Portfolio turnover ................................................................. 11% 17% 29%
Senior securities (preferred stock) outstanding (000 omitted) ...................... $ 30,000 $ 30,000 $ 30,000
Asset coverage on preferred stock at year end ...................................... 399% 408% 415%
------------------------------------------------------------------------------------------------------------------------------
/(1)/ As required, effective 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 six
months ended April 30, 2002 was to decrease net investment income per
share by $0.05, decrease net realized and unrealized loss on investments
and foreign exchange losses by $0.05 and decrease the ratio of net
investment income to average net asset from 5.71% to 4.66% based on common
shareholders. Per share, ratios and supplemental data for periods prior to
November 1, 2001 have not been restated to reflect this change in
presentation.
/(2)/ Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each period reported. Dividends and distributions, if any, are assumed
for the purposes of this calculation to be reinvested at prices obtained
under the Fund's dividend reinvestment plan. Total investment return does
not reflect brokerage commissions. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in years where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from
the beginning to the end of such years. Conversely, total investment
return based on net asset value will be lower than total investment return
based on market value in periods where there is a decrease in the discount
or an increase in the premium of the market value to the net asset value
from the beginning to the end of such years.
/(3)/ Ratios are calculated on the basis of income and expenses applicable to
both the common and preferred shares relative to the average net assets of
common shareholders. Ratio of net investment income before preferred stock
dividends to average net assets of common shareholders is 5.34%, 6.98%,
7.12%, 6.76%, 7.50%, and 8.10%, respectively.
Aberdeen Commonwealth Income Fund, Inc. 23
Financial Highlights (concluded)
For the Year Ended
October 31,
----------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value per common share, beginning of period .......................... $ 13.07 $ 13.94 $ 14.32
-------- -------- --------
Net investment income .......................................................... 0.87 0.99 1.14
Net realized and unrealized gains (losses) on investments and
foreign currencies .......................................................... (0.70) (0.73) (0.34)
Dividends to preferred shareholders:
From net investment income .................................................. (0.11) (0.14) (0.17)
From net realized gains on investment transactions .......................... (0.04) (0.04) --
-------- -------- --------
Total from investment operations applicable to
common shareholders ....................................................... 0.02 0.08 0.63
-------- -------- --------
Dividends and distributions to common shareholders:
From net investment income .................................................. (0.62) (0.87) (0.99)
Tax return of Capital ....................................................... -- -- --
From net realized gains on investment transactions .......................... (0.33) (0.08) (0.02)
-------- -------- --------
Total dividends and distributions ........................................... (0.95) (0.95) (1.01)
-------- -------- --------
Net asset value per common share, end of period ................................ $ 12.14 $ 13.07 $ 13.94
======== ======== ========
Market value, end of period .................................................... $ 10.375 $10.8125 $12.4375
======== ======== ========
Number of shares of common stock outstanding (000 omitted) ..................... 9,266 9,266 9,266
Total investment return based on:/(2)/
Market value ................................................................ 4.89% (5.59)% 13.78%
Net asset value ............................................................. 1.53% 1.82% 5.76%
Ratio to Average Net Assets Applicable to Common
Shareholders/(3)/Supplementary Data:
Net assets of common shareholders, end of period (000 omitted) ................. $112,504 $121,096 $129,158
Average net assets of common shareholders (000 omitted) ........................ 119,257 122,266 130,125
Operating expenses ............................................................. 1.95% 1.70% 1.63%
Net investment income/(3)/...................................................... 5.53% 6.17% 6.88%
Portfolio turnover ............................................................. 40% 36% 24%
Senior securities (preferred stock) outstanding (000 omitted) .................. $ 30,000 $ 30,000 $ 30,000
Asset coverage on preferred stock at year end .................................. 475% 504% 530%
--------------------------------------------------------------------------------------------------------------------
/(1)/ As required, effective 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 six
months ended April 30, 2002 was to decrease net investment income per
share by $0.05, decrease net realized and unrealized loss on investments
and foreign exchange losses by $0.05 and decrease the ratio of net
investment income to average net asset from 5.71% to 4.66% based on common
shareholders. Per share, ratios and supplemental data for periods prior to
November 1, 2001 have not been restated to reflect this change in
presentation.
/(2)/ Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each period reported. Dividends and distributions, if any, are assumed
for the purposes of this calculation to be reinvested at prices obtained
under the Fund's dividend reinvestment plan. Total investment return does
not reflect brokerage commissions. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in years where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from
the beginning to the end of such years. Conversely, total investment
return based on net asset value will be lower than total investment return
based on market value in periods where there is a decrease in the discount
or an increase in the premium of the market value to the net asset value
from the beginning to the end of such years.
/(3)/ Ratios are calculated on the basis of income and expenses applicable to
both the common and preferred shares relative to the average net assets of
common shareholders. Ratio of net investment income before preferred stock
dividends to average net assets of common shareholders is 5.34%, 6.98%,
7.12%, 6.76%, 7.50%, and 8.10%, respectively.
24 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements
Note 1. Investment Objectives
Aberdeen Commonwealth Income Fund, Inc. (the "Fund") was incorporated in
Maryland on June 28, 1991, as a closed-end, non-diversified investment company.
The Fund's principal investment objective is to provide high current income by
investing primarily in fixed-income securities denominated in Commonwealth
Currencies. As a secondary investment objective, the Fund seeks capital
appreciation, but only when consistent with its principal investment objective.
The Fund will seek to achieve its investment objective through investment in
securities denominated in the Commonwealth Currencies and in Global Debt
Securities. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic developments in a specific
industry, country or region.
Note 2. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Basis of Presentation: The financial statements of the Fund are prepared in
accordance with accounting principles generally accepted in the United States of
America using the United States dollar as both the functional and reporting
currency. However, the Commonwealth Currencies (excluding New Zealand) are the
functional currencies for Federal tax purposes (see Taxes below).
Foreign Currency Translation: Foreign currency amounts are translated into
United States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities -- at
the closing rates of exchange as reported by a major bank;
(ii) purchases and sales of investment securities, income and expenses -- at the
rates of exchange prevailing on the respective dates of such transactions.
The Fund isolates that portion of the results of operations arising as a result
of changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at fiscal period end.
Similarly, the Fund isolates the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of portfolio
securities sold during the fiscal year.
Net realized foreign exchange losses includes realized foreign exchange gains
and losses from sales and maturities of portfolio securities, sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the amounts of
interest, discount and foreign withholding taxes recorded on the Fund's books
and the U.S. dollar
Aberdeen Commonwealth Income Fund, Inc. 25
Notes to Financial Statements (continued)
equivalent amounts actually received or paid. Net unrealized foreign exchange
losses include changes in the value of portfolio securities and other assets and
liabilities arising as a result of changes in the exchange rate. Accumulated
realized and unrealized foreign exchange losses shown in the composition of net
assets represent foreign exchange losses for book purposes that have not yet
been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rates of the Commonwealth Currencies utilized by the Fund at April
30, 2002 were US$.5370 to A$1.00, US$0.6371 to C$1.00, US$0.4475 to NZ$1.00,
US$1.4573 to (pound)1.00.
Security Valuation: Investments are stated at value. Investments for which
market quotations are readily available are valued at the last trade price on or
within one local business day of the date of determination as obtained from a
pricing source. If no such trade price is available, such investments are valued
at the quoted bid price or the mean between the quoted bid and asked price on
the date of determination as obtained from a pricing source. Securities for
which market quotations are not readily available are valued at fair value in
good faith using methods determined by or under the direction of the Fund's
Board of Directors.
Securities purchased with a maturity of less than 60 days are valued at
amortized cost. Securities purchased with a maturity of greater than 60 days are
valued at current market quotations until the 60th day prior to maturity. At
that time, the value of the security on the 61st day prior to maturity is
amortized on a straight-line basis to value the security for the remaining 60
days.
Repurchase Agreements: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Fund's policy that its
custodian/counterparty segregates the underlying collateral securities, the
value of which exceeds the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the collateral is valued on a daily basis to determine
its adequacy. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized
26 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements (continued)
and unrealized gains and losses from security and currency transactions are
calculated on the identified cost basis. Interest income is recorded on an
accrual basis. Discounts on securities purchased are accreted on an effective
yield basis over the estimated lives of the respective securities. Expenses are
accrued on a daily basis.
Change in Accounting Principles: As required, effective 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. This change has no impact on the
net asset value of the Fund. Prior to November 1, 2001, the Fund did not
amortize premiums on debt securities.
The Fund determined that the adoption of premium amortization policy resulted in
a cumulative reduction of $3,549,925 in the recorded cost of investments (but
not their market value) and a corresponding $3,549,925 increase in net
unrealized appreciation on investments and foreign exchange losses, based on
investments owned by the Fund on November 1, 2001.
The effect of this change for the six-month period ended April 30, 2002, was to
decrease net investment income by $472,412, decrease net unrealized
appreciation/depreciation on investments and foreign exchange losses by $572,260
and increase net realized gains by $1,044,672. Because the Fund determines its
required distributions under Federal income tax laws, adoption of this principle
will not affect the amount or composition of distributions paid to shareholders.
The statements of changes in net assets and financial highlights for prior
periods have not been restated to reflect the change in accounting principle.
Derivative Financial Instruments: The Fund is authorized to use derivatives to
manage both currency and interest rate risk for global debt securities. With
respect to investments denominated in Commonwealth currencies, derivatives can
only be used to manage interest rate risk. Losses may arise due to changes in
the value of the contract if the counterparty does not perform under the
contract.
Forward Currency Contracts: A forward currency contract involves an obligation
to purchase and sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. The foreign currency contract is
marked-to-market daily and the change in market value is recorded by the Fund as
an unrealized gain or loss. When the forward currency contract is closed, the
Fund records a realized gain or
Aberdeen Commonwealth Income Fund, Inc. 27
Notes to Financial Statements (continued)
loss equal to the difference between the value at the time it was opened and the
value at the time it was closed.
Financial futures contracts: A futures contract is an agreement between two
parties to buy and sell a security for a set price on a future date. Upon
entering into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in the value of the contract.
Such receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of April 30, 2002, there were no open futures contracts.
Options: When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received). As of
April 30, 2002, there were no open option contracts.
Dividends: Dividends and distributions to common shareholders are recorded on
the ex-dividend date. These are based upon net investment income and capital and
currency gains determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the United States of
America. These differences are primarily due to differing treatments for foreign
currencies and loss deferrals. Dividends and distributions to preferred
shareholders are accrued on a daily basis and are determined as described in
Note 6.
Taxes: For Federal income and excise tax purposes, substantially all of the
Fund's transactions are accounted for using the functional currencies.
Accordingly, only realized currency gains and losses resulting from the
repatriation of any of the Commonwealth Currencies into U.S. dollars or another
Commonwealth Currency and realized currency gains and
28 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements (continued)
losses on non-Commonwealth currencies are recognized for tax purposes.
No provision has been made for United States of America Federal income taxes
because it is the Fund's policy to meet the requirements of the United States of
America Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to shareholders. Under the
applicable foreign tax law, a withholding tax may be imposed on interest and
discounts earned at various rates.
Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and net realized gains on investment and currency
transactions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statements of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash includes domestic and foreign
currency.
Use of Estimates: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Note 3. Agreements
The Fund has agreements with Aberdeen Asset Managers (C.I.) Limited (the
"Investment Manager"), Aberdeen Asset Management Limited (the "Investment
Adviser"), and Princeton Administrators, L.P. (the "Administrator"). The
Investment Manager and the Investment Adviser are wholly-owned subsidiaries of
Aberdeen Asset Management Plc. The Investment Manager has entered into an
agreement with CIBC World Markets, Inc. (the "Consultant").
The Investment Manager makes investment decisions on behalf of the Fund on the
basis of recommendations and information furnished to it by the Investment
Adviser and the Consultant, including the selection of and the placement of
orders with brokers and dealers to execute portfolio transactions on behalf of
the Fund.
The management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 0.65% of the Fund's
average weekly net assets up to $200 million, 0.60% of such assets between $200
million and $500 million and 0.55% of such assets in excess of $500 million. The
administration agreement provides the Administrator with a fee computed and
payable monthly at
Aberdeen Commonwealth Income Fund, Inc. 29
Notes to Financial Statements (continued)
the annual rate of 0.20% of the Fund's average weekly net assets, subject to a
minimum annual payment of $150,000 ($12,500 per month). The Investment Manager
pays fees to the Investment Adviser and the Consultant for their services
rendered.
The Investment Manager informed the Fund that it paid $149,290 to the Investment
Adviser and $6,000 to the Consultant during the six months ended April 30, 2002.
Effective March 1, 2000, the Fund entered into an agreement with EquitiLink USA,
Inc. (doing business under the name Aberdeen Asset Management ("AAM"), an
affiliate, to provide investor relation services. This agreement provides AAM
with a monthly retainer of $4,000 plus out of pocket expenses. For the six
months ended April 30, 2002, the Fund paid AAM $27,328.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended April 30, 2002 aggregated $11,283,286 and $18,711,105,
respectively.
The United States of America federal income tax basis of the Fund's investments
at April 30, 2002 was $121,687,808 and accordingly, net unrealized depreciation
for United States federal income tax purposes was $3,311,119 (gross unrealized
appreciation -- $1,179,921, gross unrealized depreciation--$4,491,041.)
For federal income tax purposes, the Fund had a capital loss carryforward as of
October 31, 2001 of approximately $428,662 which expires in 2009. Accordingly,
no capital gains distributions are expected to be paid to shareholders until
future net gains have been realized in excess of such carryforward.
Note 5. Common Stock
There are 300 million shares of $.001 par value common stock authorized and
9,266,209 shares outstanding at April 30, 2002.
On March 1, 2001, the Board of Directors approved a stock repurchase program.
The stock repurchase program allows the Fund to repurchase up to 10% of its
outstanding common stock in the open market during any 12-month period, if and
when the discount to net asset value is at least 10%. Through April 30, 2002,
there have been no share repurchases through this program.
Note 6. Preferred Stock
There are 100 million shares of $.001 par value of Auction Market Preferred
Stock ("Preferred Stock") authorized. The preferred shares have rights as
determined by the Board of Directors. The 1,200 shares of Preferred Stock
outstand-
30 Aberdeen Commonwealth Income Fund, Inc.
Notes to Financial Statements (concluded)
ing consist of one series, W-7. The Preferred Stock has a liquidation value of
$25,000 per share plus any accumulated but unpaid dividends whether or not
declared.
Dividends on the Preferred Stock are cumulative at a rate typically reset every
seven days based on the results of an auction. Dividend rates ranged from 1.87%
to 2.70% during the six months ended April 30, 2002. Under the Investment
Company Act of 1940, the Fund may not declare dividends or make other
distributions on shares of common stock or purchase any such shares if, at the
time of the declaration, distribution or purchase, asset coverage with respect
to the outstanding Preferred Stock would be less than 200%.
The Preferred Stock is redeemable at the option of the Fund, in whole or in
part, on any dividend payment date at $25,000 per share plus any accumulated but
unpaid dividends. The Preferred Stock is also subject to mandatory redemption at
$25,000 per share plus any accumulated but unpaid dividends, whether or not
declared, if certain requirements relating to the composition of the assets and
liabilities of the Fund as set forth in the Articles of Incorporation are not
satisfied.
The holders of Preferred Stock have voting rights equal to the holders of common
stock (one vote per share) and will vote together with holders of shares of
common stock as a single class. However, holders of Preferred Stock are also
entitled to elect two of the Fund's directors.
A recent Securities and Exchange Commission staff announcement, Emerging Issues
Task Force Discussion ("EITF D"-98), Classification and Measurement of
Redeemable Securities, was issued providing new guidance related to the
presentation of Preferred Shares in the financial statements. To conform with
this guidance, the Fund has reclassified its Preferred Stock outside of net
assets in the Statement of Assets and Liabilities and restated its Statement of
Changes in Net Assets to reflect only net assets applicable to common
shareholders.
Note 7. Subsequent Dividends
Subsequent to April 30, 2002, the Board of Directors of the Fund declared
distributions of $0.06 per common share payable on June 7, 2002 and July 12,
2002 to common shareholders of record on May 31, 2002 and June 28, 2002.
Subsequent to April 30, 2002, dividends and distributions declared and paid on
preferred shares totaled approximately $90,912 for the outstanding preferred
share series through June 20, 2002.
Aberdeen Commonwealth Income Fund, Inc. 31
APPENDIX A
ECONOMIC INFORMATION
[TO COME]
APPENDIX B
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and 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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements
because 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 or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Unrated: When no rating has been assigned, or when a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemptions; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each general
rating classification from Aa through B. 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 that generic rating category.
STANDARD & POOR'S CORPORATION
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in the higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB: Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B: Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC: Bonds rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, they are not likely
to pay interest and repay principal.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
APPENDIX C
SALOMON SMITH BARNEY WORLD GOVERNMENT
BOND INDEX
(as of March 31, 2002)
The following countries comprise the index:
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
Portugal
Spain
Switzerland
Sweden
United States
NOTE: Australia, Canada and the United Kingdom as are included in the index,
however, as Commonwealth Countries they have been omitted here due to the fact
that the references to the index are made with the exception of those countries.
[# of shares]
Shares of Common Stock
ABERDEEN GLOBAL
INCOME FUND, INC.
Managed by
Aberdeen Asset Managers (C.I.)
Limited
Issuable Upon Exercise of
Transferable Rights to
Subscribe for Such
Shares of Common Stock
------------------------
P R O S P E C T U S
------------------------
Dealer Managers
[record date +2]
No dealer, salesperson or any other 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, the Investment Adviser or any of the Dealer Managers.
This Prospectus does not constitute an offer to sell or the solicitation of any
offer to buy any security other than the shares of Common Stock offered by this
Prospectus, nor does it constitute an offer to sell or a solicitation of any
offer to buy the shares of Common Stock 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
subsequent to the date hereof. However, if any material change occurs while this
Prospectus is required by law to be delivered, the Prospectus will be amended or
supplemented accordingly.
TABLE OF CONTENTS
Page
Prospectus Summary ......................................................
Fund Expenses ...........................................................
Financial Highlights ....................................................
The Offer ...............................................................
Use of Proceeds .........................................................
The Fund ................................................................
Investment Objective and Policies .......................................
Portfolio Securities ....................................................
Investment Restrictions .................................................
Risk Factors and Special Considerations .................................
Portfolio Composition ...................................................
Management of the Fund ..................................................
Code of Ethics ..........................................................
Management Agreement and Advisory Agreement .............................
Administration Agreement ................................................
Consulting Agreement ....................................................
Portfolio Transactions and Brokerage ....................................
Net Asset Value of Common Stock .........................................
Dividend and Distributions: Dividend ....................................
Reinvestment and Cash Purchase Plan ...................................
Taxation ................................................................
Capital Stock ...........................................................
Custodian, Dividend Paying Agents, Transfer Agents,
Registrars and Auction Agent ..........................................
Experts .................................................................
Distribution Arrangements ...............................................
Legal Proceedings .......................................................
Legal Matters ...........................................................
Financial Statements .................................................... F-1
Report of Independent Accountants .......................................
Appendix A .............................................................. A-1
Appendix B .............................................................. B-1
Until ________, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
108
PART C
Item 24. Financial Statements and Exhibits
1. Financial Statements
(i) Portfolio of Investments as of October 31, 2001
(ii) Statement of Assets and Liabilities as of October 31, 2001
(iii) Statement of Operations for the fiscal year ended October 31,
2001
(iv) Statement of Cash Flows for the fiscal year ended October 31,
2001
(v) Statement of Changes in Net Assets for the fiscal years ended
October 31, 2001 and October 31, 2000
(vi) Financial Highlights
(vii) Notes to the Financial Statements
(viii) Report of Independent Accountants
(i) Portfolio of Investments as of April 30, 2002
(ii) Statement of Assets and Liabilities as of April 30, 2002
(iii) Statement of Operations for the six months ended April 30, 2002
(iv) Statement of Cash Flows for the six months ended April 30, 2002
(v) Statement of Changes in Net Assets for the six months ended April
30, 2002 (unaudited) and fiscal year ended October 31, 2001
(audited)
(vi) Notes to the Financial Statements
(vii) Financial Highlights for the six months ended April 30, 2002
(unaudited) and for each fiscal year in the five-year period
ended October 31, 2001 (audited)
2. Exhibits
(a)(1) Articles of Incorporation, dated June 28, 1991.
(a)(2) Articles of Amendment and Restatement, dated February 3, 1992.
(a)(3) Articles Supplementary, dated July 27, 1992.
(a)(4) Amendment to Articles Supplementary, dated August 14, 1992 (Previously
filed as Exhibit (a)(4) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-2 filed with the
Securities and Exchange Commission ("SEC") via EDGAR on August 30, 2001
("PEA 5") and incorporated herein by reference).
(a)(5) Amendment to Articles Supplementary, dated October 30, 1992 (Previously
filed as Exhibit (a)(5) to PEA 5 and incorporated herein by reference).
(a)(6) Amendment to Articles Supplementary, dated October 30, 1992 (Previously
filed as Exhibit (a)(6) to PEA 5 and incorporated herein by reference).
(a)(7) Amendment to Articles Supplementary dated January 28, 1993 (Previously
filed as Exhibit (a)(7) to PEA 5 and incorporated herein by reference).
(a)(8) Amendment to Articles Supplementary dated July 20, 1994 (Previously
filed as Exhibit (a)(8) to PEA 5 and incorporated herein by reference).
(a)(9) Amendment to Articles Supplementary dated November 15, 1996 (Previously
filed as Exhibit (a)(9) to PEA 5 and incorporated herein by reference).
(a)(10) Articles of Amendment dated December 3, 1996 (Previously filed as
Exhibit (a)(9)(ii) to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-2 filed with SEC via EDGAR on October
15, 2001 and incorporated herein by reference).
(a)(11) Amendment to Articles Supplementary dated June 11, 1998 (Previously
filed as Exhibit (a)(10) to PEA 5 and incorporated herein by reference).
(a)(12) Amendment to Articles Supplementary dated January 19, 1999 (Previously
filed as Exhibit (a)(11) to PEA 5 and incorporated herein by reference).
(a)(13) Amendment to Articles Supplementary dated November 17, 1999 (Previously
filed as Exhibit (a)(12) to PEA 5 and incorporated herein by reference).
(a)(14) Articles Supplementary dated August 14, 2000 (Previously filed as
Exhibit (a)(13) to PEA 5 and incorporated herein by reference).
(a)(15) Articles of Amendment dated May 1, 2001.
(a)(16) Articles of Amendment dated July 1, 2002.
(a)(17) Amendment to Articles Supplementary dated September 12, 2002.
(b) By-Laws as Amended and Restated through September 12, 2002.
(c) Not applicable.
(d)(1) Form of Share Certificate for Common Stock.*
(d)(2) Form of Share Certificate for Auction Market Preferred Stock.*
(d)(3) Form of Subscription Certificate.*
(d)(4) Form of Nominee Holder Over Subscription Form.*
(d)(5) Form of Beneficial Owner Certification.*
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(d)(6) Form of Subscription Rights Agency Agreement.*
(e) Dividend Reinvestment and Cash Purchase Plan.*
(f) Not applicable.
(g)(1) Management Agreement dated December 21, 2000 (Previously filed as
Exhibit (g)(4) to PEA 5 and incorporated herein by reference).
(g)(2) Investment Advisory Agreement dated December 21, 2000 (Previously filed
as Exhibit (g)(5) to PEA 5 and incorporated herein by reference).
(h)(1) Form of Dealer Manager Agreement.*
(h)(2) Form of Selling Group Agreement.*
(h)(3) Form of Soliciting Dealer Agreement.*
(i) Not applicable.
(j)(1) Custodian Contract with State Street Bank and Trust dated February 20,
1992.
(j)(2) Amendment to the Custodian Contract dated December 4, 1998 (Previously
filed as Exhibit (j)(2) to PEA 5 and incorporated herein by reference).
(k)(1) Transfer Agency Agreement dated February 20, 1992.
(k)(2) Administration Agreement dated February 20, 1992.
(k)(3) Investor Relations Agreement dated March 1, 2000.
(k)(4) Assignment and Assumption (relating to Investor Relations Agreement)
dated January 1, 2002.
(l)(1) Opinion and Consent of Dechert.*
(l)(2) Opinion and Consent of UK counsel.*
(m) Forms ADV-NR of the Investment Manager and Investment Adviser.*
(n)(1) Opinion and Consent of Canadian counsel.*
(n)(2) Opinion and Consent of Australian counsel.*
(n)(3) Opinion and Consent of Jersey, Channel Islands counsel.*
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(n)(4) Opinion and Consent of New Zealand counsel.*
(n)(5) Opinion and Consent of counsel to Underwriters.*
(n)(6) Opinion and Consent of Maryland counsel.*
(n)(7) Opinion and Consent of Switzerland counsel.*
(n)(8) Opinion and Consent of Singapore counsel.*
(n)(9) Opinion and Consent of PricewaterhouseCoopers, Independent Accountants.*
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r)(1) Code of Ethics for Registrant, Investment Manager and Investment
Adviser.
(r)(2) Codes of Ethics for Dealer Managers.*
(s) Powers of Attorney.
---------
* To be filed by further pre-effective amendment.
Item 25. Marketing Arrangements
See Dealer Manager Agreement to be filed as Exhibit (h)(1).
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Item 26. Other Expenses of Issuance and Distribution
The following table sets forth estimated expenses to be
incurred in connection with the offering described in the
Registration Statement:
Registration fees $ _____
Printing $ _____
Fees and expenses of qualification under state securities
laws (including fees of counsel) $ _____
Legal fees and expenses $ _____
Reimbursement of Dealer Manager expenses $ _____
Auditing fees and expenses $ _____
New York Stock Exchange listing fees $ _____
Subscription Agent fees and expenses $ _____
Information Agent fees and expenses $ _____
Engraving and printing stock certificates $ _____
NASD Fee $ _____
Marketing Costs $ _____
Miscellaneous $ _____
Total $ _____
Item 27. Persons Controlled by or Under Common Control.
None.
Item 28. Number of Holders of Securities.
TITLE OF CLASS NUMBER OF
RECORD
HOLDERS
Common Stock ($.001 par value per share) ______
Auction Market Preferred Stock, Series W-7 ($.001
par value per share) 1
Item 29. Indemnification.
Section 2-418 of the General Corporate Law of Maryland, the state in
which the Registrant was organized, empowers a corporation, subject to
certain limitations, to indemnify its directors and officers against
expenses (including attorney's fees, judgments, fines and certain
settlements), including the advancement of expenses, actually and
reasonably incurred by them in connection with any suit or proceeding
to which they are a party. In order to obtain advancements on expenses
a director or officer must, among other requirements stated in the
Registrant's By-laws, provide a written affirmation of good faith
belief that the standard of conduct necessary for indemnification has
been met and a written undertaking to repay any advance if it is
determined that such standard was not met. Indemnification of directors
and officers will not be provided when a
C-5
director of officer shows willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of their office. The indemnification of directors and officers
continues after such person has ceased being a director or officer,
with regard to the duties performed while employed or in offices with
the Registrant, and the benefits of indemnification inure to the heirs,
executors and administrators of such person. Employees and agents who
are not directors or officers of the Registrant may be indemnified.
Paragraphs (a) and (b) of Article IX: Liability; Indemnification of the
Registrant's Articles of Incorporation (as amended to date) provide:
(a) Indemnification. The Corporation, including its successors and
assigns, shall indemnify its Directors and officers and make advanced
payment of related expenses to the fullest extent permitted, and in
accordance with the procedures required, by the General Laws of the
State of Maryland and the Investment Company Act of 1940, as amended.
The By-Laws may provide that the Corporation shall indemnify its
employees and/or agents in any manner and within such limits as
permitted by applicable law. Such indemnification shall be in addition
to any other right or claim to which any Director, Officer, employee or
agent may otherwise be entitled. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a Director,
Officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a Director, Officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or employee
benefit plan, against any liability (including, with respect to
employee benefit plans, excise taxes) asserted against and incurred by
such person in any such capacity or arising out of such person's
position, whether or not the Corporation would have had the power to
indemnify against such liability. The rights provided to any person by
this Article IX shall be enforceable against the Corporation by such
person who shall be presumed to have relied upon such rights in serving
or continuing to serve in the capacities indicated herein. No amendment
of the Corporation's Charter shall impair the rights of any person
arising at any time with respect to events occurring prior to such
amendment.
(b) Liability for Money Damages. To the fullest extent permitted by the
Maryland General Corporation Law and the Investment Company Act of
1940, as amended, no Director or Officer of the Corporation shall be
liable to the Corporation or to its stockholders for money damages. No
amendment to the Corporation's Charter or repeal of any of its
provisions shall limit or eliminate the benefits provided to Directors
and Officers under this provision with respect to any act or omission
which occurred prior to such amendment or repeal.
Article IX of the Registrant's By-Laws (as amended to date) provides:
Section 1. Indemnification of Directors and Officers. The Corporation
shall indemnify its Directors and officers to the fullest extent
permitted by the
C-6
Maryland General Corporation Law and the Investment Company Act of
1940, as amended (the "1940 Act"). The Corporation shall indemnify its
Directors and officers who, while serving as Directors or officers,
also serve at the request of the Corporation as a director, officer,
partner, trustee, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, other enterprise or employee benefit
plan to the fullest extent consistent with law. The indemnification and
other rights provided by this Article shall continue as to a person who
has ceased to be a Director or officer and shall inure to the benefit
of the heirs, executors and administrators of such a person. This
Article shall not protect any such person against any liability to the
Company or any stockholder thereof to which such person would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office ("disabling conduct").
Section 2. Advances. Any current or former Director or officer of the
Corporation seeking indemnification within the scope of this Article
shall be entitled to advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with the matter as to
which he is seeking indemnification in the manner and to the fullest
extent permissible under the Maryland General Corporation Law and the
1940 Act, without a preliminary determination of entitlement to
indemnification (except as provided below). The person seeking advances
shall provide to the Corporation a written affirmation of his good
faith belief that the standard of conduct necessary for indemnification
by the Corporation has been met and a written undertaking to repay any
such advance if it should ultimately be determined that the standard of
conduct has not been met. In addition, at least one of the following
additional conditions shall be met: (i) the person seeking advances
shall provide security in form and amount acceptable to the Corporation
for his undertaking; (ii) the Corporation is insured against losses
arising by reason of the advance; or (iii) a majority of a quorum of
Directors of the Corporation who are neither "interested persons" as
defined in section 2(a)(19) of the 1940 Act nor parties to the
proceeding ("disinterested non-party directors"), or independent legal
counsel, in a written opinion, shall have determined, based on a review
of facts readily available to the Corporation at the time the advance
is proposed to be made, that there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
Section 3. Procedure. At the request of any person claiming
indemnification under this Article, the Board of Directors shall
determine, or cause to be determined, in a manner consistent with the
Maryland General Corporation Law and the 1940 Act, whether the
standards required by this Article have been met. Indemnification shall
be made only following: (i) a final decision on the merits by a court
or other body before whom the proceeding was brought that the person to
be indemnified was not liable by reason of disabling conduct or (ii) in
the absence of such a decision, a reasonable determination, based upon
a review of the facts, that the person to be indemnified was not liable
by reason of disabling conduct by
C-7
(A) the vote of a majority of a quorum of disinterested non-party
directors or (B) an independent legal counsel in a written opinion.
Section 4. Indemnification of Employees and Agents. Employees and
agents who are not officers or Directors of the Corporation may be
indemnified, and reasonable expenses may be advanced to such employees
or agents, as may be provided by action of the Board of Directors or by
contract, subject to any limitations imposed by the Investment Company
Act of 1940, as amended.
Section 5. Other Rights. The Board of Directors may make further
provision consistent with law for indemnification and advance of
expenses to Directors, officers, employees and agents by resolution,
agreement or otherwise. The indemnification provided by this Article
shall not be deemed exclusive of any other right, with respect to
indemnification or otherwise, to which those seeking indemnification
may be entitled under any insurance or other agreement or resolution of
stockholders or disinterested directors or otherwise.
Section 6. Amendments. References in the Article are to the Maryland
General Corporation Law and to the Investment Company Act of 1940, as
amended. No amendment of these By-Laws shall affect any right of any
person under this Article based on any event, omission or proceeding
prior to the amendment.
Section 7. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a Director, officer,
employee or agent of the Corporation or who, while a Director, officer,
employee or agent of the Corporation, is or was serving at the request
of the Corporation as a Director, officer, partner, trustee, employee
or agent of another foreign or domestic corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan, against any
liability asserted against and incurred by such person in any such
capacity or arising out of such person's position; provided that no
insurance may be purchased by the Corporation on behalf of any person
against any liability to the Corporation or to its stockholders to
which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Reference is made to Section 7 of the Dealer Manager Agreement, filed
as Exhibit (h)(1), for provisions relating to limitation of liability
of the Investment Manager and Investment Adviser. Reference is made to
Section 3 of the Management Agreement, filed on August 30, 2001 as
Exhibit (g)(4), for provisions relating to limitation of liability of
the Investment Manager. Reference is made to Section 3 of the Advisory
Agreement, filed on August 30, 2001 as Exhibit (g)(5), for provisions
relating to limitation of liability of the Investment Adviser.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant
C-8
pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser.
Capacity, Name of Company
Name, Principal Business Address (Description of Company)
Chong Yoon Chou Director, Aberdeen Asset
Level 6, 201 Kent Street Management Asia Ltd. (Funds
Sydney NSW 2000 Australia management company);
Alternate Director, MIDF
Aberdeen Asset Management Sdn
Bhd (Funds management company
- JV with Aberdeen Asia).
Christopher Fishwick Director, Aberdeen Asia-Pacific
No. 1 Seaton Place Income Investment Company Limited;
St. Helier, Jersey JE4 8YJ Director, Aberdeen Asset Management
PLC; Director, Aberdeen Asset
Managers Jersey Limited; Director,
Aberdeen Asset Managers Limited;
Director, Aberdeen Australia Equity
Income Fund; Director,
Aberdeen Graham Asset Management
Limited; Director, Aberdeen High
Income Trust PLC; Director, Aberdeen
Preferred Income Trust PLC;
Director, Chaucer Holdings PLC;
Director, European Growth & Income
Trust PLC; Director, Jersey Phoenix
Trust Limited; Director, Leveraged
Income Fund Limited; Director,
Phoenix-Aberdeen International
Advisors LLC; Director, Real Estate
Opportunities Limited; Director, The
Enhanced Zero Trust PLC; Director,
The European Technology and Income
Company Limited; Director, The First
Australia Fund Inc; Director, The
Media and Income Trust PLC;
Director, The Smaller Companies
Investment Trust PLC; Director, The
Taverners Trust PLC; Director, The
Technology and Income Trust Limited;
Director, Themis Investment
Management Limited; Director,
Treasury Holdings Limited; Director,
Aberdeen Preferred Securities PLC;
Director, Aberdeen Unit Trust
Managers Limited.
Alan Goodson Director, Aberdeen Asset Managers
No. 1 Seaton Place Jersey Limited (Fund Management);
St. Helier, Jersey JE4 8YJ Officer, Aberdeen Prime Wealth
Management Limited (Private Client
Asset Management).
Melissa Hall Director and Officer, Aberdeen
Level 6, 201 Kent Street Asset Management Holdings Limited
Sydney NSW 2000 Australia (EL) (Holding Company); Director
and Officer, AESOT Pty Ltd.
(Trustee Company); Officer,
EquitiLink Holdings Limited (Holding
Company); Officer, Aberdeen Leaders
Limited (ML) (Listed
C-9
Company); Officer, EquitiLink eLink Limited
(FRDF) (Listed Company); Director and
Officer, En Holdings Ltd. (Trustee Company);
Officer, EquitiLink Pacific Ltd. (Dormant
Company); Officer, EquitiLink Portfolio
Management (Subsidiary Company); Officer,
Aberdeen Asset Management Limited (EAL)
(Subsidiary); Officer, EL Retirement Fund
(Trustee Company); Director and Officer,
Sarrun Pty Ltd. (Trustee Company).
Christian Hamon Director, Trident Fund Services (Jersey)
No. 1 Seaton Place Limited (Fund Administration Services).
St. Helier, Jersey JE4 8YJ
Charles Macrae Employee, Aberdeen Asset Management PLC
Level 6, 201 Kent Street (Head of Aberdeen's company secretarial unit
Sydney NSW 2000 Australia based in London, overseeing the provision of
services to Aberdeen's UK and Jersey
registered closed end funds); Officer,
Aberdeen Asset Management Holdings Limited
(Holding company for the Australian
Subsidiary).
Joe Tham Officer, Aberdeen Asset Management
Level 6, 201 Kent Street Holdings Limited (EL) (Holding company
Sydney NSW 2000 Australia of Australian Subsidiary); Officer,
AESOT Pty Ltd. (Trustee Company for
Aberdeen employee share ownership scheme);
Officer, Aberdeen Leaders Limited (Closed
end listed investment company); Officer,
EquitiLink eLink Limited (FRDF) (Closed
end listed investment company); Officer,
Chifley Financial
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Services Limited (Financial
Services Company previously
owned by Aberdeen); Officer,
Chifley Operating Services
Limited (Financial Services
Company previously owned by
Aberdeen).
Item 31. Location of Accounts and Records.
For records pursuant to Rule 31a-1(b)(4):
Princeton Administrators, L.P.
P.O. Box 9095
Princeton, New Jersey 08543-9095
For records pursuant to Rule 31a-1(b)(5),
(6),(9),(10) and (11) and Rule 31a-1(f):
Aberdeen Asset Managers (C.I.) Limited
P.O. Box 578
17 Bond Street
St. Helier, Jersey JE45XB
Channel Islands
For all other records:
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Item 32. Management Services.
Not applicable.
Item 33. Undertakings
(1) The Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if: (a) subsequent to the effective
date of its registration statement, the NAV of its shares declines
more than 10 % from its NAV as of the effective date of the
registration statement or (b) the NAV increases to an amount
greater than its net proceeds as stated in the prospectus.
(2) Not applicable.
(3) The Registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by underwriters
during the subscription period, amount of unsubscribed securities
to be purchase by underwriters, and the terms of
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any subsequent reoffering thereof. The Registrant further
hereby undertakes to file a post-effective amendment to set
forth the terms of any public offering made by the
underwriters of the securities being registered if such terms
differ from those set forth on the cover page of the
prospectus.
(4) Not applicable.
(5) (a) The Registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act, 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 Registrant
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.
(b) The Registrant hereby undertakes that for the purposes of
determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) The Registrant undertakes 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.
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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 District of Columbia on this 8th day of October, 2002.
ABERDEEN GLOBAL INCOME FUND, INC.
*
---------------
Hugh Young
President
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 date indicated:
* President (Principal October 8, 2002
------------- Executive Officer)
Hugh Young
* Treasurer and October 8, 2002
------------------------ Assistant Secretary
Christian Pittard (Principal Financial
and Accounting Officer)
*
------------------------
Martin J. Gilbert Chairman, Director October 8, 2002
*
------------------------
David L. Elsum Director October 8, 2002
*
------------------------
Laurence S. Freedman Director October 8, 2002
*
------------------------
Neville J. Miles Director October 8, 2002
*
------------------------
William J. Potter Director October 8, 2002
*
------------------------
Peter D. Sacks Director October 8, 2002
*
------------------------
Anton E. Schrafl Director October 8, 2002
*
------------------------
E. Duff Scott Director October 8, 2002
*
------------------------
John T. Sheehy Director October 8, 2002
*
------------------------
Warren C. Smith Director October 8, 2002
*By /s/ Sander M. Bieber
-----------------------
Sander M. Bieber
as Attorney-in-Fact
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Exhibits: Index
(a)(1) Articles of Incorporation, dated June 28, 1991.
(a)(2) Articles of Amendment and Restatement, dated February 3, 1992.
(a)(3) Articles Supplementary dated July 27, 1992.
(a)(15) Articles of Amendment dated May 1, 2001.
(a)(16) Articles of Amendment dated July 1, 2002.
(a)(17) Amendment to Articles Supplementary dated September 12, 2002.
(b) By-Laws as Amended and Restated dated September 12, 2002.
(j)(1) Custodian Contract with State Street Bank and Trust dated
February 20, 1992.
(k)(1) Transfer Agency Agreement dated February 20, 1992.
(k)(2) Administration Agreement dated February 20, 1992.
(k)(3) Investor Relations Agreement dated March 1, 2000.
(k)(4) Assignment and Assumption dated January 1, 2002.
(r)(1) Code of Ethics for Registrant, Investment Manager and Investment
Adviser.
(s) Powers of Attorney.
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