<PAGE>
GLOBAL HIGH INCOME DOLLAR FUND INC.
COMMON STOCK
------------------------
Global High Income Dollar Fund Inc. (the 'Fund') is a non-diversified,
closed-end management investment company. The Fund's primary investment
objective is to achieve a high level of current income. As a secondary objective
the Fund seeks capital appreciation, to the extent consistent with its primary
objective. Under normal market conditions, the Fund invests at least 65% of its
total assets in U.S. dollar-denominated debt securities of issuers located in
emerging market countries, including Brady Bonds and zero coupon securities. The
Fund may also invest up to 35% of its total assets in non-U.S.
dollar-denominated debt securities (i) of issuers located in emerging market
countries or (ii) of issuers not located in emerging market countries that are
denominated in or indexed to the currencies of emerging market countries.
Investment in debt securities of issuers located in emerging market countries
involves special considerations that are not typically associated with
investment in debt securities of issuers located in the United States.
Substantially all of the Fund's assets may be invested in high yield, high risk
(lower grade) debt securities that are predominantly speculative. The Fund may
utilize leveraging techniques which will create the opportunity for increased
net income but, at the same time, will involve special risks. THE FUND IS
DESIGNED FOR INVESTORS WILLING TO ASSUME ADDITIONAL RISK IN RETURN FOR THE
POTENTIAL FOR HIGH CURRENT INCOME. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND. SEE 'OTHER INVESTMENT
PRACTICES--LEVERAGE' AND 'SPECIAL CONSIDERATIONS AND RISK FACTORS.' No assurance
can be given that the Fund will achieve its investment objectives.
The Fund's common stock ('Common Stock') is listed and traded on the New
York Stock Exchange, Inc. ('NYSE') under the symbol 'GHI.' The Common Stock may
be offered pursuant to this Prospectus from time to time in order to effect
over-the-counter ('OTC') secondary market sales by PaineWebber Incorporated
('PaineWebber') in its capacity as a dealer and secondary market-maker at
negotiated prices related to prevailing market prices on the NYSE at the time of
sale. The closing price for the Common Stock on the NYSE on February 22, 1996
was $13.13. See 'Trading History.' The Fund will not receive any proceeds from
the sale of Common Stock offered pursuant to this Prospectus.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins') serves as
investment adviser and administrator of the Fund. This Prospectus concisely sets
forth certain information an investor should know before investing, and should
be retained for future reference. A Statement of Additional Information ('SAI')
dated March 1, 1996 has been filed with the Securities and Exchange Commission
and is incorporated by reference in its entirety into this Prospectus. A Table
of Contents for the SAI is set forth as the last section of this Prospectus. A
copy of the SAI can be obtained without charge by writing to the Fund, by
contacting your PaineWebber investment executive or PaineWebber's correspondent
firms or by calling toll-free (800) 852-4750.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PAINEWEBBER INCORPORATED
------------------------
The date of this Prospectus is March 1, 1996.
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)................... None(1)
Dividend Reinvestment Plan Fees.................................. None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON
STOCK)(2)
Investment Advisory and Administration Fees...................... 1.25%
Interest Payments on Borrowed Funds(3)........................... 0.00%
Other Expenses................................................... 0.21%
Total Annual Expenses....................................... 1.46%
</TABLE>
- ------------------
(1) Prices for shares of Common Stock traded in the OTC secondary market will
reflect ordinary dealer mark-ups.
(2) See 'Management of the Fund' for additional information. The investment
advisory and administration fees payable to Mitchell Hutchins are greater
than the advisory and administration fees paid by most funds. 'Other
Expenses' have been estimated based upon expenses actually incurred for the
Fund's last fiscal year.
(3) The Fund may borrow money. See 'Other Investment Practices--Leverage.'
EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return and (ii)
reinvestment of all dividends and other distributions at net asset value:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -------- ----------- ---------- ---------
<S> <C> <C> <C>
$15 $46 $ 80 $ 175
</TABLE>
This Example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown (except that Annual Expenses have
been reduced to reflect the completion of organization expense amortization
after five years from commencement of investment operations). The above tables
and the assumption in the Example of a 5% annual return and reinvestment at net
asset value are required by regulation of the Securities and Exchange Commission
('SEC') applicable to all closed-end investment companies; the assumed 5% annual
return is not a prediction of, and does not represent, the projected or actual
performance of the Common Stock. In addition, while the Example assumes
reinvestment of all dividends and other distributions at net asset value,
participants in the Fund's Dividend Reinvestment Plan will receive shares of the
Common Stock purchased by the Plan's agent at the market price in effect at that
time, which may be at, above or below net asset value.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information ('SAI'). Investors should carefully consider
information set forth under the heading 'Special Considerations and Risk
Factors.'
<TABLE>
<CAPTION>
<S> <C>
The Fund................. Global High Income Dollar Fund Inc. (the 'Fund') is a
non- diversified, closed-end management investment
company. See 'The Fund.'
The Offering............. Shares of the Fund's common stock ('Common Stock')
may be offered pursuant to this Prospectus from time
to time in order to effect over-the-counter ('OTC')
secondary market sales by PaineWebber Incorporated
('PaineWebber') in its capacity as a dealer and
secondary market-maker at negotiated prices related
to prevailing market prices on the New York Stock
Exchange ('NYSE') at the time of sale. The Common
Stock is listed and traded on the NYSE under the
symbol 'GHI.' See 'The Offering' and 'Trading
History.'
Investment Objectives and
Policies............... The Fund's primary investment objective is to achieve
a high level of current income. As a secondary
objective the Fund seeks capital appreciation, to the
extent consistent with its primary objective. The
Fund is designed for investors willing to assume
additional risk in return for the potential for high
current income. The Fund is not intended to be a
complete investment program, and there is no
assurance that the Fund will achieve its investment
objectives.
Under normal market conditions, the Fund invests at
least 65% of its total assets in U.S.
dollar-denominated debt securities of issuers located
in emerging market countries, including Brady Bonds
(as defined herein) and zero coupon securities. The
Fund may also invest up to 35% of its total assets in
non-U.S. dollar-denominated debt securities (i) of
issuers located in emerging market countries or (ii)
of issuers not located in emerging market countries
that are denominated in or indexed to the currencies
of emerging market countries. The Fund's investment
in debt securities consists of (i) debt securities
issued or guaranteed by governments, their agencies,
instrumentalities or political subdivisions located
in emerging market countries, or by central banks
located in emerging market countries (collectively,
'Sovereign Debt'); (ii) interests in issuers
organized and operated for the purpose of
securitizing or restructuring the investment
characteristics of Sovereign Debt; and (iii) debt
securities issued by banks and other business
entities located in emerging market countries or
issued by banks and other business entities not
located in emerging market countries but denominated
in or indexed to the currencies of emerging market
countries.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
As used in this Prospectus, emerging market countries
generally include every country in the world other
than the United States, Canada, Japan, Australia, New
Zealand and most Western European countries. A list
of the primary emerging market countries in which the
Fund expects some or all of its investments to be
made primarily is set forth on page 13. While the
Fund generally is not restricted in the portion of
its assets which may be invested in a single country
or region, under normal conditions, the Fund's assets
are invested in issuers located in at least three
countries.
Debt securities held by the Fund may take the form of
bonds, notes, bills, debentures, convertible
securities, warrants (as defined herein), bank debt
obligations, short-term paper, loan participations,
assignments and interests issued by entities
organized and operated for the purpose of
restructuring the investment characteristics of
Sovereign Debt. Based on current market conditions
and investment opportunities, it is anticipated that
from time to time at least 50% of the Fund's assets
will be invested in Brady Bonds (as defined herein),
in U.S. dollar-denominated bonds sold in the United
States ('Yankee bonds') and in other bonds
denominated in U.S. dollars or other currencies and
sold to investors outside the United States
('Eurobonds'). Many of the Brady Bonds and other
Sovereign Debt instruments in which the Fund invests
are likely to be acquired at a discount.
Zero coupon securities of governmental or private
issuers generally pay no cash interest to their
holders prior to maturity. Accordingly, although the
Fund will receive no payments on its zero coupon
securities prior to their maturity or disposition, it
will have income attributable to such securities, and
it will be required, in order to maintain the desired
tax treatment available to regulated investment
companies under the federal income tax law, to
include in its dividends the income attributable to
its zero coupon securities. Such dividends will be
paid from the cash assets of the Fund, from
borrowings or by liquidating portfolio securities, if
necessary, at a time that the Fund otherwise might
not have done so. The risks associated with holding
illiquid securities that are not readily marketable
may be accentuated at such time.
See 'Investment Objectives and Policies,' 'Other
Investment Practices' and 'Special Considerations and
Risk Factors.'
Investment Adviser and
Administrator.......... Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'), a wholly owned asset management
subsidiary of PaineWebber, serves as the Fund's
investment adviser and administrator. Mitchell
Hutchins provides investment advisory and portfolio
management services to investment companies, pension
funds and other institutional, corporate and
individual clients. As of January 31, 1996, total
assets under Mitchell Hutchins' management were
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
approximately $44.8 billion. As of that date,
Mitchell Hutchins served as investment adviser or
sub-adviser to 34 registered investment companies
with 68 separate portfolios having aggregate assets
of approximately $30.4 billion. Of that amount,
approximately $2.9 billion represented assets of
globally oriented registered investment companies.
See 'Management of the Fund.'
Dividends and Other
Distributions.......... Dividends from the Fund's net investment income are
declared and paid monthly. In addition, the Fund may
(but is not required to) distribute with its monthly
dividends all or a portion of any net realized gains
from foreign currency transactions and net short-term
capital gain, if any. The Fund distributes annually
to its stockholders substantially all of its realized
net capital gain (the excess of net long-term capital
gain over net short-term capital loss) and any
undistributed net foreign currency gains and net
short-term capital gain. The Fund may make additional
distributions if necessary to avoid a 4% excise tax
on certain undistributed income and capital gain. See
'Dividends and Other Distributions; Dividend
Reinvestment Plan' and 'Taxation.'
Dividend Reinvestment
Plan................... The Fund has established a Dividend Reinvestment Plan
('Plan') under which all stockholders whose shares of
Common Stock are registered in their own names, or in
the name of PaineWebber (or its nominee), have all
dividends and other distributions on their shares of
Common Stock automatically reinvested in additional
shares of Common Stock, unless they elect to receive
cash. Additional shares of Common Stock acquired
under the Plan are purchased in the open market, on
the NYSE or otherwise, at prices that may be higher
or lower than the net asset value per share of Common
Stock at the time of the purchase. Stockholders who
hold their shares in the name of a broker or nominee
other than PaineWebber (or its nominee) should
contact such other broker or nominee to determine
whether, or how, they may participate in the Plan.
The Fund will not issue any new shares of Common
Stock in connection with the Plan. See 'Dividends and
Other Distributions; Dividend Reinvestment Plan.'
Special Considerations
and Risk Factors......... Investments in Emerging Market
Securities. Investments in emerging market
securities involve certain considerations not
typically associated with investing in securities of
U.S. companies, including (i) currency devaluations
and other currency exchange rate fluctuations, (ii)
political uncertainty and instability, including
military coups, (iii) more substantial government
involvement in the economy, (iv) higher rates of
inflation, (v) less government supervision and
regulation of the securities markets and participants
in those markets, (vi) controls on foreign investment
and limitations on repatriation of invested capital
and on the Fund's ability to
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
exchange local currencies for U.S. dollars, and (vii)
greater price volatility, substantially less
liquidity and significantly smaller capitalization of
securities markets.
Interest and dividend income on emerging market
securities may be subject to withholding and other
taxes, which would reduce the yield on such
securities to the Fund and which may not be
recoverable by the Fund or its stockholders. In
addition, because the Fund may invest up to 35% of
its total assets in non-U.S. dollar-denominated
securities, changes in foreign currency exchange
rates will affect the Fund's net asset value, the
value of interest and dividends earned and gains and
losses realized on the sale of securities denominated
in foreign currencies. The operating expense ratio of
the Fund can be expected to be higher than that of an
investment company investing in U.S. securities
because certain expenses of investing in emerging
market securities, such as custodial costs, are
higher.
Only a limited market, if any, currently exists for
hedging instruments relating to securities or
currencies in most emerging market countries.
Accordingly, under present circumstances, the Fund
does not anticipate that it normally will be able to
effectively hedge its currency exposure or investment
in such markets.
Investments in Sovereign Debt. Investments in
Sovereign Debt involve special risks. Foreign
governmental issuers of debt or the governmental
authorities that control the repayment of the debt
may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may
be limited or no legal recourse in that, generally,
remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions,
especially a sovereign entity's willingness to meet
the terms of its debt obligations, are of
considerable significance. Also, there can be no
assurance that the holders of commercial bank loans
to the same sovereign entity may not contest payments
to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements. In
addition, there is no bankruptcy proceeding with
respect to Sovereign Debt on which a sovereign has
defaulted and the Fund may be unable to collect all
or any part of its investment in a particular issue.
A sovereign debtor's willingness or ability to repay
principal or pay interest in a timely manner may be
affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt
service burden to the economy as a whole, the
sovereign debtor's policy toward principal
international lenders and the political constraints
to which a sovereign debtor may be subject. Political
changes or a deterioration of a country's domestic
economy or balance of trade may also affect the
willingness of countries to service their Sovereign
Debt. Foreign
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
investment in certain Sovereign Debt is restricted or
controlled to varying degrees, including requiring
governmental approval for the repatriation of income,
capital or proceeds of sales by foreign investors.
These restrictions or controls may at times limit or
preclude foreign investment in certain Sovereign Debt
and increase the costs and expenses of the Fund. A
substantial portion of the Sovereign Debt in which
the Fund invests, including Brady Bonds, is issued as
part of debt restructurings and such debt is to be
considered speculative. There is a history of
defaults with respect to commercial bank loans by
public and private entities issuing Brady Bonds. All
or a portion of the interest payments and/or
repayment of principal with respect to Brady Bonds
may be uncollateralized.
Investments in Debt Securities. The value of the
debt securities held by the Fund, and thus the net
asset value per share of the Common Stock, generally
will fluctuate with (i) changes in the perceived
creditworthiness of the issuers of those securities,
(ii) movements in interest rates, and (iii) changes
in the relative values of the currencies in which the
Fund's investments are denominated with respect to
the U.S. dollar. The extent of the fluctuation of the
Fund's net asset value will depend on various other
factors, such as the average maturity of the Fund's
investments, the extent to which the Fund engages in
borrowing and other leveraging transactions, the
extent to which the Fund holds instruments
denominated in foreign currencies and the extent to
which the Fund hedges its interest rate, credit and
currency exchange rate risks. Many of the debt
obligations in which the Fund invests, including
Brady Bonds, will have long maturities. A longer
average maturity generally is associated with a
higher level of volatility in the market value of
such securities in response to changes in market
conditions. In addition, securities issued at a deep
discount, such as certain types of Brady Bonds and
zero coupon obligations in which the Fund may invest,
are subject to greater fluctuations of market value
in response to changes in interest rates than debt
obligations of comparable maturities that were not
issued at a deep discount.
Investments in Lower Grade Securities. A substantial
portion of the Fund's assets may be invested in debt
securities, including Sovereign Debt such as Brady
Bonds, that are rated below investment grade as
determined by internationally recognized securities
rating organizations, such as Moody's Investors
Service, Inc. ('Moody's') or Standard & Poor's, a
division of The McGraw Hill Companies, Inc. ('S&P'),
or securities that are unrated but deemed by Mitchell
Hutchins to be of comparable quality. Debt securities
rated BBB by S&P or Baa by Moody's, and comparable
unrated securities, are considered to be investment
grade, although
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
such securities have speculative characteristics.
Changes in economic conditions or other circumstances
are more likely, in Moody's view, to lead to a
weakened capacity for the issuers of such securities
to make interest and principal payments than is the
case for higher grade debt securities. Debt
securities rated below investment grade are deemed by
S&P and Moody's to be predominantly speculative with
respect to the issuer's capacity to pay interest and
repay principal and to involve major risk exposures
to adverse conditions. The lower grade securities in
which the Fund may invest may include securities
having the lowest ratings assigned by S&P or Moody's
and, together with comparable unrated securities, may
include securities in default or that face the risk
of default with respect to the payment of principal
or interest. These securities are considered to have
extremely poor prospects of ever attaining any real
investment standing.
Lower grade debt securities generally offer a higher
yield than that available from higher grade issues
with similar maturities. However, lower grade debt
securities involve higher risks, in that they are
especially subject to adverse changes in general
economic conditions and in the industries in which
the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in
response to changes in interest rates. During periods
of economic downturn or rising interest rates, highly
leveraged issuers may experience financial stress,
which could adversely affect their ability to make
payments of principal and interest on, and increase
the possibility of default of, such debt securities.
The market for lower grade debt securities generally
is thinner and less active than that for higher
quality securities. As a result, the Fund could find
it more difficult to sell such securities when
Mitchell Hutchins believes it advisable to do so or
may be able to sell such securities only at prices
lower than if such securities were more widely
traded.
Although Mitchell Hutchins attempts to minimize the
speculative risks associated with investments in such
securities through credit analysis, attention to
current trends in interest rates and other factors
and investments in a variety of securities, investors
should carefully review the investment objectives and
policies of the Fund and consider their ability to
assume the investment risks involved before making an
investment.
Leverage. The Fund may utilize financial leverage
with respect to 33 1/3% of its total assets through
borrowing money for investment purposes, to pay
dividends or to fund repurchases of its Common Stock.
The Fund will only use leverage when Mitchell
Hutchins believes that such leverage will benefit the
Fund after taking leverage risks into consideration.
The Fund's net asset value and
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
yield may be more volatile due to the Fund's use of
leverage which may, in turn, result in increased
volatility of the market price of the shares of
Common Stock. The Fund expects that most of its
leverage would be in the form of bank borrowings and
reverse repurchase agreements. To the extent the
income derived from leverage exceeds the interest and
other expenses that the Fund will have to pay in
connection with such leverage, the Fund's net income
will be greater than if leverage were not used.
Conversely, if the income obtained is not sufficient
to cover the cost of the leverage, the net income of
the Fund will be less than if leverage were not used,
and therefore the amount available for distribution
to stockholders will be reduced. The requirement that
the Fund segregate a specified amount of cash or
liquid, high grade debt securities with its custodian
in connection with the use of certain types of
leverage could have an adverse effect on the income
earned and dividends paid by the Fund.
Lending of Portfolio Securities. The Fund is
authorized to lend up to 33 1/3% of the total value
of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains with
the Fund's custodian bank collateral either in cash,
U.S. government securities, marked to market daily,
or letters of credit in an amount at least equal to
the market value of the securities loaned, plus
accrued interest and dividends.
Illiquid Securities. The Fund may invest without
limitation in illiquid securities. The Fund may not
be able readily to dispose of such securities at
prices that approximate those at which the Fund could
sell such securities if they were more widely traded
and, as a result of such illiquidity, the Fund may
have to sell other investments or engage in borrowing
transactions if necessary to raise cash to meet its
obligations.
Non-Diversified Status. As a 'non-diversified'
investment company, as defined by the Investment
Company Act of 1940 ('1940 Act'), the Fund may be
subject to greater risk with respect to its portfolio
securities than an investment company that is
'diversified' because changes in the financial
condition or market assessment of a single issuer may
cause greater fluctuations in the net asset value of
the Fund's shares.
Anti-Takeover Provisions. The Fund's Articles of
Incorporation contain provisions limiting (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 of Incorporation. These provisions of the
Articles of Incorporation may be regarded as
'anti-takeover' provisions. These provisions could
have the effect of depriving the stockholders of
opportunities to sell their shares at a
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the
Fund in a tender offer or similar transaction. See
'Investment Objectives and Policies,' 'Other
Investment Practices,' 'Special Considerations and
Risk Factors' and 'Description of Capital Stock.'
Market Price and Net
Asset Value of
Shares................. Shares of closed-end investment companies, including
the Fund, frequently trade at a discount to their net
asset values. See 'Trading History.' Whether
investors will realize gains or losses upon the sale
of shares of the Common Stock will not depend
directly upon changes in the Fund's net asset value,
but will depend upon whether the market price of the
Common Stock at the time of sale is above or below
the original purchase price for the shares. The
market price of the Common Stock is determined by
such factors as relative demand for and supply of
such shares in the market, general market and
economic conditions, changes in the Fund's net asset
value and other factors beyond the control of the
Fund. The Common Stock is designed primarily for
long-term investors, and investors in the Common
Stock should not view the Fund as a vehicle for
short-term trading purposes. See 'Special
Considerations and Risk Factors' and 'Description of
Capital Stock.'
Stock Repurchases and
Tender Offers;
Conversion to Open-End
Fund................... In recognition of the possibility that the Common
Stock might trade at a discount from net asset value
and that any such discount may not be in the interest
of stockholders, the Fund's Board of Directors, in
consultation with Mitchell Hutchins, intends to
review at least annually the possibility of open
market Common Stock repurchases or tender offers at
net asset value. The Board of Directors also will
consider from time to time the conversion of the Fund
to an open-end investment company. There can be no
assurance that the Board of Directors will decide to
undertake either of these actions or that, if
undertaken, such actions will result in the Common
Stock trading at a price equal to or close to net
asset value per share. See 'Description of Capital
Stock.'
</TABLE>
10
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for the Common
Stock for the periods shown. This information is supplemented by the financial
statements and accompanying notes appearing in the Fund's Annual Report to
Shareholders for the fiscal year ended October 31, 1995 which are incorporated
by reference into the Fund's SAI and can be obtained by stockholders upon
request. The financial statements and notes and the financial information in the
table below have been audited by Price Waterhouse LLP, independent accountants,
whose report thereon also is included in the Annual Report to Shareholders.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD OCTOBER
OCTOBER 31, 8, 1993+
-------------------- TO
1995 1994 OCTOBER 31, 1993
-------- -------- ----------------------
<S> <C> <C> <C>
Net asset value, beginning of
period...................... $ 12.83 $ 15.21 $ 15.00
-------- -------- -----------
Net investment income......... 1.34 1.43 0.04
Net realized and unrealized
gains (losses) from
investments and foreign
currency transactions....... 0.21 (2.40) 0.17
-------- -------- -----------
Total increase (decrease) from
investment operations....... 1.55 (0.97) 0.21
-------- -------- -----------
Dividends from net investment
income...................... (1.16) (1.34) --
Distributions of
paid-in-capital............. (0.15) (0.07) --
-------- -------- -----------
Total dividends and
distributions............... (1.31) (1.41) --
-------- -------- -----------
Net asset value, end of
period...................... $ 13.07 $ 12.83 $ 15.21
-------- -------- -----------
-------- -------- -----------
Per share market value, end of
period...................... $ 11.63 $ 11.50 $ 15.00
-------- -------- -----------
-------- -------- -----------
Total investment return (1)... 13.65% (14.80)% 0.00%
-------- -------- -----------
-------- -------- -----------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $297,087 $291,752 $345,755
Expenses to average net
assets...................... 1.46% 1.50% 1.41%*
Net investment income to
average net assets.......... 10.76% 10.40% 4.60%*
Portfolio turnover rate....... 71% 51% 1%
</TABLE>
- ------------------
* Annualized
+ Commencement of operations
(1) Total investment return on market value is calculated assuming a purchase of
one share at market value on the first day of each period reported,
reinvestment of all dividends and other distributions in accordance with the
Dividend Reinvestment Plan, and a sale at market value on the last day of
each period reported. Total investment returns for periods of less than one
year have not been annualized.
11
<PAGE>
THE FUND
The Fund is a non-diversified, closed-end management investment company and
has registered as such under the 1940 Act. The Fund was incorporated under the
laws of the State of Maryland on February 23, 1993 and commenced operations on
October 8, 1993. The Fund's principal office is located at 1285 Avenue of the
Americas, New York, New York 10019, and its telephone number is (212) 713-2000.
THE OFFERING
The Common Stock may be offered pursuant to this Prospectus from time to
time in order to effect OTC secondary market sales by PaineWebber in its
capacity as a dealer and secondary market-maker at negotiated prices related to
prevailing market prices on the NYSE at the time of sale. Costs incurred in
connection with this offering will be paid by PaineWebber. PaineWebber's
principal offices are located at 1285 Avenue of the Americas, New York, New York
10019. Mitchell Hutchins is a wholly owned subsidiary of PaineWebber.
USE OF PROCEEDS
The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by PaineWebber as a
result of its OTC secondary market sales of the Common Stock will be utilized by
PaineWebber in connection with its secondary market operations and for general
corporate purposes.
TRADING HISTORY
The Common Stock is listed and traded on the NYSE under the symbol 'GHI.'
The following table sets forth for the Common Stock for each fiscal quarter
within the two most recent fiscal years and each fiscal quarter since the
beginning of the current fiscal year: (a) the per share high and low sales
prices as reported by the NYSE; (b) the per share net asset values, based on the
Fund's computation as of 4:00 p.m., Eastern time, on the second to last NYSE
business day for the week corresponding to the dates on which the respective
high and low sales prices were recorded; and (c) the discount or premium to net
asset value represented by the high and low sales prices shown. The range of net
asset values and of premiums and discounts for the Common Stock during the
periods shown may be broader than is shown in this table. On February 22, 1996,
the closing price per share on the NYSE was $13.13, the Fund's net asset value
per share was $14.06 and the discount to net asset value per share was (10.07)%.
<TABLE>
<CAPTION>
(DISCOUNT) OR
NET ASSET PREMIUM TO
SALES PRICES VALUES NET ASSET VALUE
---------------- ---------------- ----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
01/31/94..... $15.63 $14.25 $15.52 $15.31 0.71% (6.92)%
04/30/94..... 15.13 12.25 15.39 12.96 (1.69) (5.48)
07/31/94..... 13.75 11.13 13.18 12.53 4.32 (11.17)
10/31/94..... 12.88 11.25 12.82 12.86 0.47 (12.52)
01/31/95..... 11.88 10.00 12.77 11.82 (6.97) (15.40)
04/30/95..... 11.38 10.25 11.85 11.38 (3.97) (9.93)
07/31/95..... 12.13 10.75 13.06 12.33 (7.12) (12.81)
10/31/95..... 11.75 11.00 13.30 12.93 (11.65) (14.93)
01/31/96..... 13.13 11.25 14.47 13.65 (9.26) (17.58)
</TABLE>
See 'Description of Capital Stock--Stock Repurchases and Tender Offers' as
to methods that may be undertaken by the Fund to reduce any discount.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to achieve a high level of
current income. As a secondary objective the Fund seeks capital appreciation, to
the extent consistent with its primary objective. The Fund is designed for
investors willing to assume additional risk in return for the potential for high
current income. The Fund is not intended to be a complete investment program and
there is no assurance that the Fund will achieve its investment objectives.
Under normal market conditions, the Fund invests at least 65% of its total
assets in U.S. dollar-denominated debt securities of issuers located in emerging
market countries, including Brady Bonds (as defined herein) and zero coupon
securities. The Fund may also invest up to 35% of its total assets in non-U.S.
dollar-denominated debt securities (i) of issuers located in emerging market
countries or (ii) of issuers not located in emerging market countries that are
denominated in or indexed to the currencies of emerging market countries. The
Fund's investment in debt securities will consist of (i) debt securities issued
or guaranteed by governments, their agencies, instrumentalities or political
subdivisions located in emerging market countries, or by central banks located
in emerging market countries (collectively, 'Sovereign Debt'); (ii) interests in
issuers organized and operated for the purpose of securitizing or restructuring
the investment characteristics of Sovereign Debt; and (iii) debt securities
issued by banks and other business entities located in emerging market countries
or issued by banks and other business entities not located in emerging market
countries but denominated in or indexed to the currencies of emerging market
countries.
As used in this Prospectus, emerging market countries generally include
every country in the world other than the United States, Canada, Japan,
Australia, New Zealand and most Western European countries. Currently, investing
in many emerging market countries may not be desirable or feasible, due to the
lack of adequate custody arrangements for the Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. The Fund
expects its investments in emerging market securities to be made primarily in
some or all of the following emerging market countries:
Algeria
Argentina
Botswana
Brazil
Bulgaria
Chile
Colombia
Costa Rica
Czech Republic
Dominican Republic
Ecuador
Ghana
Greece
Hungary
India
Indonesia
Israel
Ivory Coast
Jamaica
Jordan
Kenya
Korea
Malaysia
Mexico
Morocco
Nigeria
Panama
Peru
Philippines
Poland
Portugal
Russia
Singapore
South Africa
Swaziland
Thailand
Trinidad & Tobago
Turkey
Uruguay
Venezuela
Zambia
Zimbabwe
As opportunities to invest in debt securities in other emerging market countries
develop, the Fund expects to expand and further diversify the emerging market
countries in which it invests. While the Fund generally is not restricted in the
portion of its assets which may be invested in a single country or region, under
normal conditions, the Fund's assets are invested in issuers located in at least
three countries.
13
<PAGE>
Debt securities held by the Fund may take the form of bonds, notes, bills,
debentures, convertible securities, warrants (as defined herein), bank debt
obligations, short-term paper, loan participations, assignments and interests
issued by entities organized and operated for the purpose of restructuring the
investment characteristics of Sovereign Debt. Based on current market conditions
and investment opportunities, it is anticipated that from time to time at least
50% of the Fund's assets will be invested in Brady Bonds (as defined herein), in
U.S. dollar-denominated bonds sold in the United States ('Yankee bonds') and in
other bonds denominated in U.S. dollars or other currencies and sold to
investors outside the United States ('Eurobonds'). The Fund is not subject to
restrictions on the maturities of the debt securities it holds.
Many of the Brady Bonds and other Sovereign Debt instruments in which the
Fund invests are likely to be acquired at a discount. Pursuant to the Internal
Revenue Code, the Fund is required to accrue a portion of any original issue
discount with respect to such securities as income each year even though the
Fund does not receive interest payments in cash during the year which reflect
the discount so accrued. The Fund may also elect similar treatment for any
market discount with respect to such securities. As a result, the Fund expects
to make annual distributions of net investment income in amounts greater than
the total amount of cash it actually receives. Such distributions may be made
from the cash assets of the Fund, from borrowings or by liquidation of portfolio
securities. Such liquidation of portfolio securities may be made at times or in
market conditions or at market prices that may not be advantageous to the Fund.
The risks associated with holding securities that are not readily marketable may
be accentuated at such time. See 'Special Considerations and Risk
Factors-Illiquid Securities' and 'Taxation.'
The Fund may invest up to 35% of its total assets in non-U.S.
dollar-denominated debt securities that may be denominated in the local
currencies of emerging market countries, as well as in reserve currencies such
as the British Pound Sterling, the Belgian Franc, the Canadian Dollar, the
Deutsche Mark, the Dutch Guilder, the European Currency Unit, the French Franc,
the Italian Lira, the Japanese Yen and the Swiss Franc. Although the Fund is
permitted to engage in a wide variety of investment practices designed to hedge
against currency exchange rate risks with respect to its holdings of non-U.S.
dollar-denominated debt securities, the Fund may be limited in its ability to
hedge against these risks. See 'Other Investment Practices-Strategic
Transactions.'
Mitchell Hutchins selectively invests the Fund's assets in securities of
issuers in countries where the combination of fixed income market returns, the
price appreciation potential of fixed income securities and, with respect to
non-U.S. dollar-denominated securities, currency exchange rate movements present
opportunities for high current income and, secondarily, capital appreciation.
Assets are allocated among various countries based upon Mitchell Hutchins'
analysis of credit risk of the universe of emerging market country issuers and
the factors noted above. Emerging market country sovereign credit analysis
includes an evaluation of the issuing country's total debt levels, currency
reserve levels, net exports/imports, overall economic growth, level of
inflation, currency fluctuation, political and social climate and payment
history. Particular debt securities will be selected based upon credit risk
analysis of potential issuers, the characteristics of the security and interest
rate sensitivity of the various debt issues for a single issuer, analysis of
volatility and liquidity of these particular debt instruments, and the tax
implications of various instruments to the Fund. The debt securities in which
the Fund may invest, including Brady Bonds, will not be required to meet a
minimum rating standard and may not be rated by any internationally recognized
securities rating organization.
As of the end of the fiscal year ended October 31, 1995, the Fund had 72.9%
of its dollar weighted average portfolio in debt securities that received a
rating from an internationally recognized securities rating organization, and
27.1% of its dollar weighted average portfolio in debt securities that were not
so rated. The Fund had the following percentages of its dollar weighted average
portfolio invested in rated securities: AAA/Aaa (including cash items)--7.1%,
AA/Aa--0.0%, A/A--0.0%, BBB/Baa--2.8%, BB/Ba--52.2%, and B/B--10.8%. It should
14
<PAGE>
be noted that this information reflects the average composition of the Fund's
assets as of the end of the fiscal year ended October 31, 1995 and is not
necessarily representative of the Fund's assets as of any other time in that
period, the current fiscal year or at any time in the future.
BRADY BONDS
The Fund may invest in Brady Bonds and other Sovereign Debt of countries
that have restructured or are in the process of restructuring Sovereign Debt
pursuant to the Brady Plan. 'Brady Bonds' are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the World Bank and the International Monetary Fund ('IMF'). The Brady
Plan framework, as it has developed, contemplates the exchange of commercial
bank debt for newly issued Brady Bonds. Brady Bonds may also be issued in
respect of new money being advanced by existing lenders in connection with the
debt restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.
Investors should recognize that Brady Bonds have been issued relatively
recently, and accordingly do not have a long payment history. Agreements
implemented under the Brady Plan generally are designed to achieve debt and
debt-service reduction through specific options negotiated by a debtor nation
with its creditors. As a result, the financial packages offered by each country
differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt, which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the Fund normally purchases Brady Bonds in secondary
markets, as described below, in which the price and yield to the investor
reflect market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with a maturity equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF, the
World Bank and the debtor nations' reserves. In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal, if any, at final maturity, (ii) the
collateralized interest payments, if any, (iii) the uncollateralized interest
payments, and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the 'residual risk'). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. The Fund may purchase Brady Bonds with no or limited
collateralization,
15
<PAGE>
and will be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. Brady Bonds generally are purchased and sold in secondary markets
through U.S. securities dealers and other financial institutions and are
generally maintained through European transnational securities depositories.
Many of the Brady Bonds and other Sovereign Debt in which the Fund invests are
likely to be acquired at a discount. See 'Taxation.'
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans ('Loans') arranged
through private negotiations between a foreign government and one or more
financial institutions ('Lenders'). The Fund's investments in Loans are expected
in most instances to be in the form of participations in Loans
('Participations') and assignments of all or a portion of Loans ('Assignments')
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Fund generally has no direct right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan ('Loan Agreement'), nor any rights of set-off against the borrower, and the
Fund may not directly benefit from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. The Fund will acquire
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by Mitchell Hutchins to be creditworthy. When the Fund
purchases Assignments from Lenders, the Fund will acquire direct rights against
the borrower on the Loan. However, since Assignments are arranged through
private negotiations between potential assignees and assignors, the rights and
obligations acquired by the Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
Because there is no liquid market for such securities, the Fund anticipates that
such securities could be sold only to a limited number of institutional
investors. The lack of a liquid secondary market will have an adverse impact on
the value of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower.
STRUCTURED INVESTMENTS
The Fund may invest a portion of its assets in interests in entities
organized and operated solely for the purpose of securitizing or restructuring
the investment characteristics of Sovereign Debt. This type of securitizing or
restructuring involves the deposit with or purchase by a U.S. or foreign entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ('Structured Investments') backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Investments to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Investments is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Investments of the
16
<PAGE>
type in which the Fund anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that
is either subordinated or not subordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Structured
Investments are typically sold in private placement transactions, and there
currently is no active trading market for Structured Investments.
OTHER INVESTMENTS
Zero Coupon Securities. The Fund may invest in 'zero coupon' and other
deep discount securities of governmental or private issuers, including certain
Brady Bonds. Zero coupon securities generally pay no cash interest to their
holders prior to maturity. Accordingly, such securities usually are issued and
traded at a deep discount from their face or par value and generally are subject
to greater fluctuations of market value in response to changing interest rates
than securities of comparable maturities and credit quality that pay cash
interest on a current basis.
Federal tax law requires that a holder of a zero coupon security accrue a
portion of the original issue discount on the security as income each year, even
though the holder receives no interest payment on the security during the year.
Federal tax law also requires that companies such as the Fund which seek to
qualify for pass-through federal income tax treatment as regulated investment
companies distribute substantially all of their net investment income each year,
including non-cash income. Accordingly, although the Fund will receive no
payments on its zero coupon securities prior to their maturity or disposition,
it will have income attributable to such securities and it will be required, in
order to maintain the desired tax treatment, to include in its dividends an
amount equal to the income attributable to its zero coupon securities. Such
dividends will be paid from the cash assets of the Fund, from borrowings or by
liquidation of portfolio securities, if necessary, at a time that the Fund
otherwise might not have done so. To the extent the Fund is required to
liquidate thinly traded securities, it may be able to sell such securities only
at prices lower than if such securities were more widely traded. To the extent
the proceeds from any such dispositions are used by the Fund to pay
distributions, it will not be able to purchase additional income-producing
securities with such proceeds, and as a result its current income ultimately may
be reduced. See 'Taxation.'
Private Placements. The Fund may invest in emerging market securities that
are sold in private placement transactions between their issuers and their
purchasers and that are neither listed on an exchange nor traded in the OTC
secondary market. In many cases, privately placed securities will be subject to
contractual or legal restrictions on transfer. As a result of the absence of a
public trading market, privately placed securities may in turn be less liquid
and more difficult to value than publicly traded securities. Although privately
placed securities may be resold in privately negotiated transactions, the prices
realized from the sales could, due to illiquidity, be less than those originally
paid by the Fund or less than if such securities were more widely traded. In
addition, issuers whose securities are not publicly traded may not be subject to
the disclosure and other investor protection requirements that may be applicable
if their securities were publicly traded. If any privately placed securities
held by the Fund are required to be registered under the securities laws of one
or more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration.
Convertible Securities. The Fund may invest in convertible securities,
which are bonds, debentures, notes, preferred stocks or other securities that
may be converted into or exchanged for a specified amount of common stock of the
same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid
17
<PAGE>
on preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have unique investment
characteristics in that they generally (i) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (ii) are
less subject to fluctuation in value than the underlying stock since they have
fixed income characteristics, and (iii) provide the potential for capital
appreciation if the market price of the underlying common stock increases. Most
convertible securities currently are issued by U.S. companies, although a
substantial Eurodollar convertible securities market has developed, and the
markets for convertible securities denominated in local currencies are
increasing. The Fund generally does not convert any convertible securities it
may own into common stock or hold them as common stock, although it may do so
for temporary purposes.
Equity Securities. The Fund may acquire equity securities (including
common stocks, rights and warrants for equity and fixed income securities) when
attached to fixed income securities or as part of a unit including fixed income
securities, or in connection with a conversion or exchange of fixed income
securities.
Warrants. The Fund may acquire warrants for equity securities, debt
securities and commodities that are acquired as units with debt securities.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other securities or commodities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to its expiration
date. The Fund generally sells any common stock or commodity received upon the
exercise of a warrant as promptly as practicable and in a manner that it
believes will reduce its risk of a loss in connection with the sale.
Investment in Other Investment Companies. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the 1940 Act, the Fund may invest up
to 10% of its total assets in securities of other investment companies. In
addition, under the 1940 Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquires shares in investment companies,
stockholders would bear both their proportionate share of expenses in the Fund
(including investment advisory and administrative fees) and, indirectly, the
expenses of such investment companies (including investment advisory and
administrative fees).
Indexed Debt Securities. The Fund may invest in debt securities issued by
banks and other business entities not located in emerging market countries that
are indexed to certain specific foreign currency exchange rates. The terms of
such securities provide that their principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligations are outstanding. While such
securities offer the potential for an attractive rate of return, they also
entail the risk of loss of principal. New forms of such securities continue to
be developed. The Fund may invest in such securities to the extent consistent
with its investment objectives.
OTHER INVESTMENT PRACTICES
STRATEGIC TRANSACTIONS
The Fund may use options (both exchange-traded and OTC) and forward
currency contracts to attempt to enhance income and realize gains and also may
attempt to reduce the overall risk of its investments (hedge) by using options,
futures contracts and forward currency contracts. Hedging strategies may also be
used in an
18
<PAGE>
attempt to manage the Fund's average duration, foreign currency exposure and
other risks of the Fund's investments, which can affect fluctuations in the
Fund's net asset value. The Fund's ability to use these strategies may be
limited by market conditions, regulatory limits and tax considerations. There
can be no assurance that the use of these strategies will succeed. The SAI
contains further information on these strategies.
The Fund may purchase and sell call and put options on bond indices and
securities in which the Fund is authorized to invest for hedging purposes or to
enhance income. The Fund also may purchase and sell interest rate futures
contracts and options thereon, may purchase and sell covered straddles on
securities, bond indices or currencies or options on futures contracts on
securities or currencies. The Fund may enter into options, futures contracts and
forward currency contracts under which up to 100% of the Fund's portfolio is at
risk.
The Fund may enter into forward currency contracts for the purchase or sale
of a specified currency at a specified future date, either with respect to
specific transactions or with respect to its portfolio positions. For example,
when Mitchell Hutchins anticipates making a currency exchange transaction in
connection with the purchase or sale of a security, the Fund may enter into a
forward contract in order to set the exchange rate at which the transaction will
be made. The Fund also may enter into a forward contract to sell an amount of a
foreign currency approximating the value of some or all of the Fund's securities
positions denominated in such currency. The Fund may use forward contracts in
one currency or a basket of currencies to hedge against fluctuations in the
value of another currency when Mitchell Hutchins anticipates there will be a
correlation between the two and may use forward currency contracts to shift a
Fund's exposure to foreign currency fluctuations from one country to another.
The purpose of entering into these contracts is to minimize the risk to the Fund
from adverse changes in the relationship between the U.S. and foreign
currencies. The Fund may also purchase and sell foreign currency futures
contracts, options thereon and options on foreign currencies to hedge against
the risk of fluctuations in market value of foreign securities the Fund holds in
its portfolio, or that it intends to purchase, resulting from changes in foreign
exchange rates. In addition, the Fund may purchase and sell options on foreign
currencies and use forward currency contracts to enhance income.
The Fund may enter into interest rate protection transactions, including
interest rate swaps, caps, collars and floors, to preserve a return or spread on
a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date or to effectively fix the rate of interest that it pays on one or more
borrowings or series of borrowings. The Fund enters into interest rate
protection transactions only with banks and recognized securities dealers
believed by Mitchell Hutchins to present minimal credit risks in accordance with
guidelines established by the Fund's Board of Directors.
The Fund might not employ any of the strategies described above, and no
assurance can be given that any strategy used will succeed. If Mitchell Hutchins
incorrectly forecasts interest or currency exchange rates, market values or
other economic factors in utilizing a strategy for the Fund, then the Fund would
have been in a better position if it had not hedged at all. The use of these
strategies involves certain special risks, including (i) the fact that skills
needed to use hedging instruments are different from those needed to select the
Fund's securities, (ii) possible imperfect correlation, or even no correlation,
between price movements of hedging instruments and price movements of the
investments being hedged, (iii) the fact that, while hedging strategies can
reduce the risk of loss, they can also reduce the opportunity for gain, or even
result in losses, by offsetting favorable priced movements in hedged
investments, and (iv) the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain 'cover' or to
segregate securities in connection with hedging transactions and the possible
inability of the Fund to close out or to liquidate its hedged position.
19
<PAGE>
Only a limited market, if any, currently exists for hedging instruments
relating to securities or currencies in most emerging market countries.
Accordingly, under present circumstances, the Fund does not anticipate that it
normally will be able to effectively hedge its currency exposure or investment
in such markets.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and tax considerations.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities on a 'when-issued' basis or may purchase
or sell securities on a 'delayed delivery' basis, i.e., for issuance or delivery
to the Fund later than the normal settlement date for such securities at a
stated price and yield. The Fund generally would not pay for such securities or
start earning interest on them until they are received. However, when the Fund
undertakes a when-issued or delayed delivery obligation, it immediately assumes
the risks of ownership, including the risk of price fluctuation. When the Fund
agrees to purchase securities on a when-issued or delayed delivery basis, its
custodian will set aside in a segregated account cash, U.S. government
securities or other liquid, high grade debt securities, marked to market daily,
in an amount at least equal to the amount of the commitment. Failure of the
issuer to deliver a security purchased by the Fund on a when-issued or delayed
delivery basis may result in the Fund's incurring a loss or missing an
opportunity to make an alternative investment. Depending on market conditions,
the Fund's when-issued and delayed delivery purchase commitments could cause its
net asset value per share to be more volatile, because such securities may
increase the amount by which the Fund's total assets, including the value of
when-issued and delayed delivery securities held by the Fund, exceed its net
assets.
LEVERAGE
The Fund is authorized to borrow money for investment purposes, to pay
dividends or to fund repurchases of its Common Stock in an amount up to 33 1/3%
of its total assets (including the amount of the borrowing and any other
indebtedness representing 'senior securities' under the 1940 Act but reduced by
any liabilities and indebtedness other than senior securities). The Fund also is
authorized to borrow an additional 5% of its total assets without regard to the
foregoing limitation for temporary or emergency purposes (such as clearance of
portfolio transactions, the payment of dividends and share repurchases).
Borrowing constitutes leverage, a speculative technique. The Fund will only use
leverage when Mitchell Hutchins believes that such leverage will benefit the
Fund after taking leverage risks into consideration.
The net asset value of the Fund and the yield on its portfolio may be more
volatile due to its use of leverage, which may, in turn, result in increased
volatility of the market price of the shares of Common Stock. Leverage also
creates interest expenses for the Fund, which will reduce the net income from
its portfolio securities. To the extent the income derived from securities
purchased with funds obtained through leverage exceeds the interest and other
expenses that the Fund will have to pay in connection with such leverage, the
Fund's net income will be greater than if leverage were not used. Conversely, if
the income from the assets obtained through leverage is not sufficient to cover
the cost of leverage, the net income of the Fund will be less than if leverage
were not used, and therefore the amount available for distribution to
stockholders will be reduced. The Fund expects that most of its leverage would
be in the form of bank borrowings and reverse repurchase agreements.
Reverse Repurchase Agreements. The Fund may leverage by entering into
reverse repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Under a reverse repurchase agreement, the Fund sells
securities and agrees to repurchase them at a mutually agreed date and price. At
the time the Fund
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enters into a reverse repurchase agreement, an approved custodian segregates
cash or liquid high grade debt securities having a value not less than the
repurchase price (including accrued interest). The market value of securities
sold under reverse repurchase agreements typically is greater than the proceeds
of the sale, and accordingly the market value of the securities sold is likely
to be greater than the value of the securities in which the Fund invests those
proceeds. Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the Fund might be unable to deliver them when the Fund seeks
to repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce the
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash, U.S. government securities, marked to
market daily, or letters of credit in an amount at least equal to the market
value of the securities loaned, plus accrued interest and divdends. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash held as collateral to the borrower or placing broker. The
Fund will receive reasonable interest on the loan or a flat fee from the
borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. The Fund will regain record ownership of
loaned securities to exercise beneficial rights, such as voting and subscription
rights and rights to dividends, interest or other distributions, when regaining
such rights is considered to be in the Fund's interest.
ILLIQUID SECURITIES
The Fund may invest without limitation in illiquid securities. The term
'illiquid securities' for this purpose means securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities and includes, among other
things, restricted securities (other than Rule 144A securities Mitchell Hutchins
has determined are liquid pursuant to guidelines established by the Fund's Board
of Directors) and repurchase agreements maturing in more than seven days.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ('1933 Act').
Such securities include those that are subject to restrictions contained in
the securities laws of other countries. However, securities that are freely
marketable in the country where they are principally traded, but would not be
freely marketable in the United States, will not be considered illiquid. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.
While certain restricted securities may be illiquid, not all restricted
securities are illiquid. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act,
including
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private placements, repurchase agreements, commercial paper, foreign securities
and corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
REPURCHASE AGREEMENTS
The Fund may use repurchase agreements. Repurchase agreements are
transactions in which the Fund purchases securities from a bank or recognized
securities dealer and simultaneously commits to resell the securities to the
bank or dealer at an agreed-upon date and price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
Although repurchase agreements carry certain risks not associated with direct
investments in securities, including possible decline in the market value of the
underlying securities and delays and costs to the Fund if the other party to the
repurchase agreement becomes bankrupt, the Fund intends to enter into repurchase
agreements only with banks and dealers in transactions believed by Mitchell
Hutchins to present minimum credit risks in accordance with guidelines
established by the Fund's Board of Directors.
DEFENSIVE AND TEMPORARY INVESTMENTS
When Mitchell Hutchins believes unusual circumstances warrant a defensive
posture, the Fund temporarily may commit all or any portion of its assets to
cash (U.S. dollars or foreign currencies) or money market instruments of U.S. or
foreign issuers, including repurchase agreements. In addition, the Fund may
commit up to 35% of its assets to cash (U.S. dollars) or U.S. dollar-denominated
money market instruments of U.S. issuers, including repurchase agreements, for
liquidity purposes (such as clearance of portfolio transactions, the payment of
dividends and expenses and share repurchases) or pending investment.
OTHER INFORMATION
The Fund's investment objectives, its classification as a non-diversified
investment company and certain investment limitations as described in the SAI
are fundamental policies that may not be changed without stockholder approval.
All other investment policies may be changed by the Fund's Board of Directors
without stockholder approval.
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SPECIAL CONSIDERATIONS AND RISK FACTORS
INVESTMENTS IN EMERGING MARKET SECURITIES
Investments in emerging market securities involve risks relating to
political and economic developments abroad, as well as those that result from
the differences between the regulations to which U.S. and emerging market
issuers are subject. The economies of individual emerging market countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
the value of the Fund's investments in those countries.
Foreign investment in certain emerging market country debt securities is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging market country
debt securities and increase the costs and expenses of the Fund. Certain
emerging market countries require governmental approval prior to investments by
foreign persons, limit the amount of investment by foreign persons in a
particular issuer, limit the investment by foreign persons only to a specific
class of securities of an issuer that may have less advantageous rights than the
classes available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging market countries may
also restrict investment opportunities in issuers in industries deemed important
to national interests.
Emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market country's balance of payments, the country could impose
temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments. Investing in local markets in
emerging market countries may require the Fund to adopt special procedures, seek
local government approvals or take other actions, each of which may involve
additional costs to the Fund.
No established secondary markets may exist for many of the emerging market
country debt securities in which the Fund may invest. Reduced secondary market
liquidity may have an adverse effect on market price and the Fund's ability to
dispose of particular instruments when necessary to meet its liquidity
requirements or in response to specific economic events such as a deterioration
in the creditworthiness of the issuer. Reduced secondary market liquidity for
certain emerging market country debt securities may also make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Market quotations are generally
available on many emerging country debt securities only from a limited number of
dealers and may not necessarily represent firm bids of those dealers or prices
for actual sales.
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Disclosure and regulatory standards in many respects are less stringent in
emerging market countries than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets, and enforcement of existing regulations
has been extremely limited.
Many of the emerging market securities held by the Fund are not registered
with the SEC, nor are the issuers thereof subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by the Fund than is available concerning U.S.
companies. Foreign companies, and in particular, companies in smaller and
emerging capital markets are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies. The Fund's net investment
income and/or capital gains from its foreign investment activities may be
subject to non-U.S. withholding taxes.
Additionally, because the Fund may invest up to 35% of its total assets in
non-U.S. dollar-denominated securities, changes in foreign currency exchange
rates will affect the Fund's net asset value, the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income to be distributed to shareholders by the Fund. If the value of
a foreign currency rises against the U.S. dollar, the value of Fund assets
denominated in such currency will increase; correspondingly, if the value of a
foreign currency declines against the U.S. dollar, the value of Fund assets
denominated in such currency will decrease. The exchange rates between the U.S.
dollar and other currencies can be volatile and are determined by factors such
as supply and demand in the currency exchange markets, international balances of
payments, government intervention, speculation and other economic and political
conditions. In addition, some foreign currency values may be volatile and there
is the possibility of governmental controls on currency exchange or governmental
intervention in currency markets. Any of these factors could affect the Fund.
The costs attributable to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding or
other government taxes that could reduce the return of these securities. Tax
treaties between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign taxes to which the Fund would be subject.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have failed to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
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SOVEREIGN DEBT
Investments in Sovereign Debt involve special risks. Certain emerging
market countries have historically experienced, and may continue to experience,
high rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, balance of payments and trade difficulties and extreme
poverty and unemployment. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt, and
the Fund may have limited legal recourse in the event of default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank loans to the same sovereign entity may not
contest payments to the holders of Sovereign Debt in the event of default under
commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency.
Another factor bearing on the ability of a country to repay Sovereign Debt
is the level of the country's international reserves. Fluctuations in the level
of these reserves can affect the amount of foreign exchange readily available
for external debt payments and, thus, could have a bearing on the capacity of
the country to make payments on its Sovereign Debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt obligations
can be affected by a change in international interest rates since the majority
of these obligations carry interest rates that are adjusted periodically based
upon international rates.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments, such as
military coups, have occurred in the past in countries in which the Fund may
invest and could adversely affect the Fund's assets should these conditions or
events recur. While Mitchell Hutchins intends to manage the Fund's portfolio in
a manner that will minimize the exposure to such risks, there can be no
assurance that adverse political changes will not cause the Fund to suffer a
loss of interest or principal on any of its holdings.
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With respect to Sovereign Debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin American
countries.
Since 1982, certain emerging market countries have experienced difficulty
in servicing their Sovereign Debt on a timely basis which led to defaults on
certain obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. Holders of Sovereign Debt,
including the Fund, may be requested to participate in the rescheduling of such
debt and to extend further loans to sovereign debtors. The interests of holders
of Sovereign Debt could be adversely affected in the course of restructuring
arrangements or by certain other factors referred to below. Furthermore, some of
the participants in the secondary market for Sovereign Debt may also be directly
involved in negotiating the terms of these arrangements and may therefore have
access to information not available to other market participants. Obligations
arising from past restructuring agreements may affect the economic performance
and political and social stability of certain issuers of Sovereign Debt. There
is no bankruptcy proceeding by which Sovereign Debt on which a sovereign has
defaulted may be collected in whole or in part.
Foreign investment in certain Sovereign Debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in such Sovereign Debt and increase the costs and expenses of
the Fund. Certain countries in which the Fund will invest require governmental
approval prior to investments by foreign persons, limit the amount of investment
by foreign persons in a particular issuer, limit the investment by foreign
persons only to a specific class of securities of an issuer that may have less
advantageous rights than the classes available for purchase by domiciliaries of
the countries and/or impose additional taxes on foreign investors. Certain
emerging market issuers may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on foreign capital
remittances. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation of capital, as well
as by the application to the Fund of any restrictions on investments. Investing
in local markets may require the Fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the Fund.
INVESTMENTS IN DEBT SECURITIES
The value of the debt securities held by the Fund, and thus the net asset
value per share of the Common Stock, generally will fluctuate with (i) changes
in the perceived creditworthiness of the issuers of those securities, (ii)
movements in interest rates, and (iii) changes in the relative values of the
currencies in which the Fund's investments are denominated with respect to the
U.S. dollar. The extent of the fluctuation of the Fund's net asset value will
depend on various other factors, such as the average maturity of the Fund's
investments, the extent to which the Fund engages in borrowing and other
leveraging transactions, the extent to which the Fund holds instruments
denominated in foreign currencies and the extent to which the Fund hedges its
interest rate, credit and currency exchange rate risks. Many of the debt
obligations in which the Fund will invest, including Brady Bonds, have long
maturities. A longer average maturity generally is associated with a higher
level of volatility in the market value of such securities. In addition,
securities issued at a deep discount, such as certain types of Brady Bonds and
zero coupon obligations in which the Fund may invest, are subject to greater
fluctuations of market value in response to changes in interest rates than debt
obligations of comparable maturities that do not trade at such a discount. See
'Investment Objectives and Policies--Other Investments--Zero Coupon Securities.'
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INVESTMENTS IN LOWER GRADE SECURITIES
A substantial portion of the Fund's assets may be invested in debt
securities, including Sovereign Debt such as Brady Bonds, that are rated below
investment grade as determined by internationally recognized securities rating
organizations, such as Moody's or S&P, or are unrated but deemed by Mitchell
Hutchins to be of comparable quality. Debt securities rated BBB by S&P or Baa by
Moody's, and comparable unrated securities, are considered to be investment
grade, although such securities have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity of the issuers of such securities to make principal and interest
payments than is the case for higher grade debt securities. Debt securities
rated below BBB by S&P or below Baa by Moody's are deemed by S&P and Moody's to
be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and may involve major risk exposure to adverse
conditions. The lower grade securities in which the Fund may invest may include
securities having the lowest ratings assigned by S&P or Moody's and, together
with comparable unrated securities, may include securities in default or that
face the risk of default with respect to the payment of principal or interest.
These securities are considered to have extremely poor prospects of ever
attaining any real investment standing. See Appendix A for a more complete
description of S&P and Moody's ratings.
The market for lower grade securities, including Sovereign Debt, generally
is thinner and less active than for higher grade securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. The Fund could find it more difficult to sell such
thinly traded securities when Mitchell Hutchins believes it advisable to do so
or may be able to sell such securities only at prices lower than if such
securities were more widely traded. The lack of a liquid secondary market for
certain lower grade securities also may make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's portfolio
and calculating its net asset value.
Lower grade debt securities generally offer a higher yield than that
available from higher grade issues. However, lower grade securities involve
higher risks, in that they are especially subject to adverse changes in general
economic conditions, and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates. Issuers of lower grade securities are
often highly leveraged and may not have available to them more traditional
methods of financing. During periods of economic downturn or rising interest
rates, highly leveraged issuers may experience financial stress which could
adversely affect their ability to make payments of principal and interest and
increase the possibility of default. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, such as the issuer's inability to meet specific projected business
or revenue forecasts or the unavailability of additional financing. Similarly,
certain emerging market governments that issue lower grade 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 interest repayments as they come due.
Lower grade debt securities frequently have call or buy-back features which
permit an issuer to call or repurchase the security from the Fund. If an issuer
exercises these provisions in a declining interest rate market, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. The risk of loss due to default by the issuer is
also significantly greater for the holders of lower grade securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. To the extent the Fund is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings, the Fund may incur additional expenses and may have limited legal
recourse in the event of a default. Debt securities issued by governments in
emerging markets can differ from debt obligations
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issued by private entities in that remedies from defaults generally must be
pursued in the courts of the defaulting government, and legal recourse is
therefore diminished.
Although Mitchell Hutchins attempts to minimize the speculative risks
associated with investments in lower grade securities through diversification,
credit analysis and attention to current trends in interest rates and other
factors, investors should carefully review the investment objectives and
policies of the Fund and consider their ability to assume the investment risks
involved before making an investment.
ILLIQUID SECURITIES
The Fund may invest without limitation in illiquid securities. To the
extent the Fund invests in illiquid securities, it may not be able readily to
dispose of such securities at prices that approximate those at which it could
sell such securities if they were more widely traded; and, as a result of such
illiquidity, the Fund may have to sell other investments or engage in borrowing
transactions if necessary to raise cash to meet its obligations. The risks
associated with these investments will be accentuated in situations in which the
Fund's operations require cash, such as if the Fund tenders for its shares of
Common Stock or when it pays dividends or other distributions, and could result
in the Fund's borrowing to meet short-term cash requirements or incurring
capital losses on the sale of these investments. The lack of a liquid secondary
market may make it more difficult for the Fund to assign a value to those
securities for purposes of valuing its portfolio and calculating its net asset
value.
ANTI-TAKEOVER PROVISIONS
The Fund's Articles of Incorporation contain provisions 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 of Incorporation. These
provisions of the Articles of Incorporation may be regarded as 'anti-takeover'
provisions. These provisions could have the effect of depriving the stockholders
of opportunities to sell their shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a stockholder who owns beneficially more than 5% of the Common Stock.
They provide, however, the advantage of potentially requiring persons seeking
control of the Fund to negotiate with its management regarding the price to be
paid and facilitating the continuity of the Fund's management, investment
objectives and policies. See 'Description of Capital Stock--Certain
Anti-Takeover Provisions of the Articles of Incorporation.'
MARKET PRICE OF SHARES
Shares of closed-end investment companies, including the Fund, frequently
trade at a discount to their net asset values. See 'Trading History.' Whether
investors will realize gains or losses upon the sale of Common Stock will not
depend directly upon changes in the Fund's net asset value, but will depend upon
whether the market price of the Common Stock at the time of sale is above or
below the original purchase price for the shares. The market price of the Common
Stock is determined by such factors as relative demand for and supply of such
shares in the market, general market and economic conditions, changes in the
Fund's net asset value and other factors beyond the control of the Fund.
Accordingly, the Common Stock is designed primarily for long-term investors, and
investors in the Common Stock should not view the Fund as a vehicle for
short-term trading purposes.
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NON-DIVERSIFICATION
The Fund is 'non-diversified,' as defined in the 1940 Act, but intends to
continue to qualify as a 'regulated investment company' for federal income tax
purposes. See 'Taxation' in the SAI. This means, in general, that more than 5%
of the Fund's total assets may be invested in securities of an issuer but only
if, at the close of each quarter of the Fund's taxable year, the aggregate
amount of such holdings does not exceed 50% of the value of its total assets and
no more than 25% of the value of its total assets is invested in the securities
of a single issuer. To the extent the Fund's portfolio at times may include the
securities of a smaller number of issuers than if it were 'diversified' (as
defined in the 1940 Act), the Fund will at such times be subject to greater risk
with respect to its portfolio securities than an investment company that invests
in a broader range of securities, because changes in the financial condition or
market assessment of a single issuer may cause greater fluctuations in the net
asset value of the Fund's shares.
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Fund is vested
with its Board of Directors. The Board of Directors approves all significant
agreements between the Fund and persons or companies furnishing services to it,
including the Fund's agreements with its investment adviser and administrator,
custodian and transfer and dividend disbursing agent and registrar. The
day-to-day operations of the Fund are delegated to its officers and to Mitchell
Hutchins, subject to the Fund's investment objectives and policies and to
general supervision by the Board of Directors.
Subject to the supervision of the Fund's Board of Directors, investment
advisory and administration services will be provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
September 30, 1993 ('Advisory Contract'). Mitchell Hutchins' principal business
address is 1285 Avenue of the Americas, New York, New York 10019. Mitchell
Hutchins is a wholly owned subsidiary of PaineWebber, which is a wholly owned
subsidiary of Paine Webber Group Inc., a publicly held financial services
holding company. Mitchell Hutchins provides investment advisory and portfolio
management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of January 31, 1996, total
assets under Mitchell Hutchins' management were approximately $44.8 billion. As
of that date, Mitchell Hutchins served as investment adviser or sub-adviser to
34 registered investment companies with 68 separate portfolios having aggregate
assets of approximately $30.4 billion. Of that amount, approximately $2.9
billion represented assets of globally oriented registered investment companies.
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities; Mitchell Hutchins also supervises
all matters relating to the operation of the Fund and obtains for it corporate
officers, clerical staff, office space, equipment and services. As compensation
for its services, Mitchell Hutchins receives a fee, computed weekly and paid
monthly, in an amount equal to the annual rate of 1.25% of the Fund's average
weekly net assets. This fee is greater than the advisory and administration fees
paid by most funds.
The Fund incurs various other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its Common Stock, taxes and governmental fees, fees and expenses of the
directors, costs of obtaining insurance, expenses of printing and distributing
shareholder materials, organizational expenses, including costs or losses to any
litigation. For the fiscal years ended October 31, 1994 and October 31, 1995,
the Fund's total expenses, stated as a percentage of average net assets, were
1.50% and 1.46%, respectively.
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<PAGE>
Stuart Waugh, a managing director of Mitchell Hutchins responsible for
global fixed income and currency trading, has been responsible for the
day-to-day management of the Fund's portfolio since its inception. Mr. Waugh has
been employed by Mitchell Hutchins as a portfolio manager for more than the last
five years. Other members of Mitchell Hutchins' global investing group provide
input on market outlook, geographic analysis and currencies and interest rate
forecasts.
Mitchell Hutchins investment personnel may engage in securities
transactions for their own accounts pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from the Fund's net investment income are declared and paid
monthly. In addition, the Fund may (but is not required to) distribute with its
monthly dividends all or a portion of any net realized gains from foreign
currency transactions and net short-term capital gain, if any. The Fund
distributes annually to its stockholders substantially all of its net realized
capital gain (the excess of net long-term capital gain over net short-term
capital loss) and any undistributed net foreign currency gains and net
short-term capital gain. The Fund may make additional distributions if necessary
to avoid a 4% excise tax on certain undistributed income and capital gain.
The Fund anticipates that a monthly dividend may, from time to time,
represent more or less than the amount of net investment income earned by the
Fund in the period to which the dividend relates. In the latter case, any
undistributed net investment income, net short-term capital gain and/or net
realized gains from foreign currency transactions ('undistributed income') would
be available to be included in future monthly dividends, which might otherwise
have been reduced by reason of a decrease in the Fund's monthly net income.
Undistributed income will be reflected in the Fund's net asset value, and
correspondingly, distributions from undistributed income will reduce the Fund's
net asset value. The dividend rate on the Common Stock will be adjusted from
time to time and will vary as a result of the performance of the Fund.
If the Fund's dividends and other distributions exceed its current and
accumulated earnings and profits in any taxable year, which may result from
currency-related losses, those distributions (to the extent of that excess) may
be treated as a return of capital to shareholders for tax purposes.
DIVIDEND REINVESTMENT PLAN
The Fund has established the Plan under which all stockholders, whose
shares of Common Stock are registered in their own names or in the name of
PaineWebber (or its nominee), have all dividends and other distributions on
their shares of Common Stock automatically reinvested in additional shares of
Common Stock, unless they elect to receive cash. The Fund will not issue any new
shares of Common Stock in connection with the Plan. Stockholders may
affirmatively elect to receive all dividends and other distributions in cash
paid by check mailed directly to them by PNC Bank, National Association
('Transfer Agent'), as dividend disbursing agent. Stockholders who intend to
hold their shares through a broker or nominee other than PaineWebber (or its
nominee) should contact such other broker or nominee to determine whether, or
how, they may participate in the Plan. The ability of such stockholders to
participate in the Plan may change if their shares of Common Stock are
transferred into the name of another broker or nominee.
30
<PAGE>
The Transfer Agent serves as agent for the stockholders in administering
the Plan. After the Fund declares a dividend or determines to make another
distribution, the Transfer Agent, as agent for the participants, receives the
cash payment and uses it to buy shares of Common Stock in the open market, on
the NYSE or otherwise, for the participants' accounts. Such shares may be
purchased at prices that are higher or lower than the net asset value per share
of the Common Stock at the time of purchase. The number of shares purchased with
each distribution for a particular stockholder equals the result obtained by
dividing the amount of the distribution payable to that stockholder by the
average price per share (including applicable brokerage commissions) that the
Transfer Agent was able to obtain in the open market. The Transfer Agent
maintains all stockholder accounts in the Plan and furnishes written
confirmations of all transactions in the accounts, including information needed
by stockholders for personal and tax records. Shares in the account of each Plan
participant are held by the Transfer Agent in non-certificated form in the name
of the participant, and each stockholder's proxy includes those shares of Common
Stock purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions are paid by the Fund. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Transfer Agent's
open market purchases of shares of the Common Stock in connection with the
reinvestment of distributions.
The automatic reinvestment of dividends and other distributions in shares
of Common Stock does not relieve participants of any income tax that may be
payable on such distributions. See 'Taxation.'
All registered holders of Common Stock (other than brokers and nominees)
are mailed information regarding the Plan, including a form with which they may
elect to terminate participation in the Plan and receive further dividends and
other distributions in cash. A holder who has elected to participate in the Plan
may terminate participation in the Plan at any time without penalty, and
stockholders who have previously terminated participation in the Plan may rejoin
it at any time. Changes in elections must be made in writing to the Transfer
Agent and should include the stockholder's name and address as they appear on
the share certificate. An election to terminate participation in the Plan, until
such election is changed, will be deemed to be an election by a stockholder to
take all subsequent distributions in cash. An election will be effective only
for distributions declared and having a record date at least ten days after the
date on which the election is received.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent to
Plan participants at least 30 days before the record date for such distribution.
The Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all Plan participants. All correspondence concerning the
Plan should be directed to the Transfer Agent at PNC Bank, National Association,
c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware 19899.
31
<PAGE>
TAXATION
The Fund intends to continue to qualify for treatment as a regulated
investment company ('RIC') under the Internal Revenue Code. For each taxable
year that the Fund so qualifies, the Fund (but not its stockholders) will be
relieved of federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gain and net gains from certain foreign currency transactions) and net capital
gain that is distributed to its stockholders.
Dividends from the Fund's investment company taxable income (whether paid
in cash or reinvested in additional Fund shares) are taxable to its stockholders
as ordinary income to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gain (whether paid in cash or reinvested
in additional Fund shares), when designated as such, are taxable to its
stockholders as long-term capital gain, regardless of how long they have held
their Fund shares. A participant in the Plan will be treated as having received
a distribution in the amount of the cash used to purchase shares of Common Stock
on his behalf, including a pro rata portion of the brokerage fees incurred by
the Transfer Agent. Distributions by the Fund will not be eligible for the
dividends-received deduction allowed to corporations. Distributions by the Fund
in any year that exceed its current and accumulated earnings and profits
generally may be applied by a stockholder against his basis for the shares and
will be taxable to him only to the extent the distributions to him exceed his
basis for the Common Stock.
An investor should be aware that, if shares of Common Stock are purchased
shortly before the record date for any dividend or capital gain distribution,
the investor will pay full price for the shares and receive some portion of the
price back as a taxable distribution.
The Fund notifies its stockholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed paid)
that year. Under certain circumstances, the notice also may specify a
stockholder's share of any foreign taxes paid by the Fund.
Upon a sale or exchange of shares of Common Stock (including a sale
pursuant to a share repurchase or tender offer by the Fund), a stockholder will
realize a taxable gain or loss equal to the difference between his adjusted
basis for the shares and the amount realized. Any such gain or loss will be
treated as a capital gain or loss if the shares are capital assets in the
stockholder's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year; provided that any loss realized on a sale
or exchange of shares of Common Stock that were held for six months or less also
will be treated as long-term, rather than as short-term, capital loss to the
extent of any capital gain distributions received thereon. A loss realized on a
sale or exchange of shares of Common Stock will be disallowed to the extent
those shares are replaced by other shares of Common Stock within a period of 61
days beginning 30 days before and ending 30 days after the date of disposition
of the shares (which could occur, for example, as the result of participation in
the Plan). In that event, the basis of the replacement shares will be adjusted
to reflect the disallowed loss.
The Fund may acquire zero coupon securities. As the holder of such
securities, the Fund would have to include in its gross income the original
issue discount that accrues on the securities during the taxable year, even if
it receives no corresponding payment thereon during the year. Because the Fund
annually must distribute substantially all of its investment company taxable
income, including any accrued original issue discount, to satisfy the
distribution requirement imposed on RICs and to avoid imposition of a 4% excise
tax on certain undistributed income and gains, the Fund may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions will be made from
the Fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales, which
would increase or decrease its investment company taxable income and/or net
capital gain. In addition, any such gains may be realized on the disposition of
securities held for less than
32
<PAGE>
three months. Because of the requirement imposed on a RIC that it derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities or certain options, futures and forward currency
contracts held for less than three months, any such gains would reduce the
Fund's ability to sell any such assets that it might wish to sell in the
ordinary course of its portfolio management.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other non-corporate stockholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
dividends and capital gain distributions payable to such stockholders who
otherwise are subject to backup withholding.
The foregoing is only a summary of the important federal tax considerations
generally affecting the Fund and its stockholders; see the SAI for a further
discussion. There may be other federal, state or local tax considerations
applicable to a particular investor. Prospective stockholders are therefore
urged to consult their tax advisers.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 100 million shares of capital stock, $.001
par value, all of which is classified as Common Stock. Although it has no
current intention of doing so, the Board of Directors of the Fund is authorized
to classify and reclassify any unissued shares of capital stock from time to
time by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or terms and conditions of
redemption of such shares by the Fund. The description of the capital stock and
the description under 'Description of Capital Stock--Certain Anti-Takeover
Provisions of the Articles of Incorporation' are subject to the provisions
contained in the Fund's Articles of Incorporation and Bylaws.
COMMON STOCK
Shares of the Common Stock have no preemptive, conversion, exchange or
redemption rights. Each share has equal voting, dividend, distribution and
liquidation rights. The outstanding shares of Common Stock are fully paid and
nonassessable. Stockholders are entitled to one vote per share. All voting
rights for the election of directors are noncumulative, which means that the
holders of more than 50% of the shares can elect 100% of the directors then
nominated for election if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors.
Under the rules of the NYSE applicable to listed companies, the Fund is
required to hold an annual meeting of stockholders in each year. If the rules of
the NYSE no longer require annual meetings of stockholders or if the Fund is
converted to an open-end investment company or if for any other reason the
Fund's shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of stockholders), the Fund
may decide not to hold annual meetings of stockholders. See 'Description of
Capital Stock--Stock Repurchases and Tender Offers.'
Any additional offerings of the Common Stock, if made, will require
approval of the Fund's Board of Directors and will be subject to the requirement
of the 1940 Act that shares may not be sold at a price below the then-current
net asset value, exclusive of underwriting discounts and commissions, except,
among other things, in connection with an offering to existing stockholders or
with the consent of a majority of the holders of the Fund's outstanding voting
securities.
33
<PAGE>
The following chart indicates the shares of the Common Stock outstanding as
of February 20, 1996.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT HELD
REGISTRANT OR FOR ITS BY REGISTRANT OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT
- --------------- ----------------- --------------------- ------------------------
<S> <C> <C> <C>
Common Stock... 100,000,000 0 22,736,667
</TABLE>
COMMON STOCK REPURCHASES AND TENDER OFFERS
In recognition of the possibility that the Common Stock might trade at a
discount from net asset value and that any such discount may not be in the best
interest of stockholders, the Fund's Board of Directors has determined that it
will from time to time consider taking action to attempt to reduce or eliminate
any discount. To that end, the Board may, in consultation with Mitchell
Hutchins, from time to time consider action either to repurchase shares of the
Common Stock in the open market or to make a tender offer for shares of the
Common Stock at their net asset value. The Board currently intends at least
annually to consider making such open market repurchases or tender offers and at
such time may consider such factors as the market price of the Common Stock, the
net asset value of the Common Stock, the liquidity of the assets of the Fund,
whether such transactions would impair the Fund's status as a RIC, general
economic conditions and such other events or conditions that may have a material
effect on the Fund's ability to consummate such transactions. The Board may at
any time, however, decide that the Fund should not repurchase shares or make a
tender offer. The Fund may borrow to finance repurchases and tender offers.
Interest on any such borrowings will reduce the Fund's net income. See
'Additional Information--Share Repurchases and Tender Offers' in the SAI.
There is no assurance that the Board of Directors will decide to undertake
Common Stock repurchases or tender offers or that these actions, if undertaken,
would result in the Common Stock trading at a price that is equal or close to
its net asset value per share.
Although the Board of Directors believes that share repurchases and tender
offers generally would have a favorable effect on the market price of the Common
Stock, it should be recognized that the Fund's acquisition of shares of the
Common Stock would decrease the Fund's total assets and therefore have the
effect of increasing the Fund's expense ratio. Because of the nature of the
Fund's investment objectives, policies and portfolio, under current market
conditions Mitchell Hutchins anticipates that repurchases and tender offers
generally should not have a material, adverse effect on the Fund's investment
performance and that Mitchell Hutchins generally should not have any material
difficulty in disposing of portfolio securities in order to consummate share
repurchases and tender offers; however, this may not always be the case.
Any tender offer made by the Fund for shares of the Common Stock generally
would be at a price equal to the net asset value of the shares on a date
subsequent to the Fund's receipt of all tenders. Each offer would be made, and
the stockholders would be notified, in accordance with the requirements of the
Securities Exchange Act of 1934 and the 1940 Act, either by publication or
mailing or both. Each offering document would contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
Each person tendering shares would pay to the Fund's Transfer Agent a service
charge to help defray certain costs, including the processing of tender forms,
effecting payment, postage and handling. Any such service charge would be paid
directly by the tendering stockholder and would not be deducted from the
proceeds of the purchase. The Fund's Transfer Agent would receive the fee as an
offset to these costs. The Fund expects that the costs of effecting a tender
offer would exceed the aggregate of all service charges received from those who
tender their shares. Costs associated with the tender would be charged against
capital.
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<PAGE>
Tendered shares of Common Stock that have been accepted and purchased by
the Fund will be held in the Fund's treasury until retired by the Board. If
treasury shares are retired, Common Stock issued and outstanding and capital in
excess of par will be reduced. If tendered shares are not retired, the Fund may
hold, sell or otherwise dispose of the shares for any lawful corporate purpose
as determined by the Board of Directors.
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Fund's Board of Directors will consider from time to time whether it
would be in the best interest of the Fund and its stockholders to convert the
Fund to an open-end investment company. If the Board of Directors were to
determine that such a conversion would be in the best interest of the Fund and
its stockholders and is consistent with the 1940 Act, the Board would submit to
the stockholders, at the next succeeding annual or special meeting, a proposal
to amend the Fund's Articles of Incorporation to so convert the Fund. Such
amendment would provide that, upon its adoption by the holders of at least a
majority of the Fund's outstanding shares entitled to vote thereon, the Fund
will convert from a closed-end to an open-end investment company. If the Fund
converted to an open-end investment company, it would be able to continuously
issue and offer for sale shares of the Common Stock, and each such share could
be presented to the Fund at the option of the holder thereof for redemption at a
price based on the then-current net asset value per share. In such an event, the
Fund could be required to liquidate portfolio securities to meet requests for
redemption, the Common Stock would no longer be listed on the NYSE and certain
investment policies of the Fund would require amendment.
In considering whether to propose that the Fund convert to an open-end
investment company, the Board of Directors will consider whether various
factors, including, without limitation, the potential benefits and detriments to
the Fund and its stockholders of conversion, the potential alternatives and the
benefits and detriments associated therewith, and the feasibility of conversion
given, among other things, the Fund's investment objectives and policies. In the
event of a conversion to an open-end investment company, the Fund may charge
fees in connection with the sale or redemption of its shares. There can be no
assurance that the Board will conclude that such a conversion is in the best
interests of the Fund or its stockholders. As an open-end investment company,
the Fund may reserve the right to honor any request for redemption by making
payment in whole or in part in securities chosen by the Fund and valued in the
same way as they would be valued for purposes of computing the Fund's net asset
value. If payment is made in securities, a stockholder may incur brokerage
expenses in converting these securities into cash.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund presently has provisions in its Articles of Incorporation that
have the effect of limiting (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 of Incorporation. These provisions of the Articles of
Incorporation may be regarded as 'anti-takeover' provisions. Under Maryland law
and the Fund's Articles of Incorporation, the affirmative vote of the holders of
at least a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund with or
into another corporation (except for certain mergers in which the Fund is the
successor), a statutory share exchange in which the Fund is not the successor, a
sale or transfer of all or substantially all of the Fund's assets, the
dissolution of the Fund and any amendment to the Fund's Articles of
Incorporation. In addition, the affirmative vote of the holders of at least
66 2/3% (which is higher than that required under Maryland law or the 1940 Act)
of the outstanding shares of the Fund's capital stock is required generally to
authorize any of the following transactions or to amend the provisions of the
Articles of Incorporation relating to such transactions:
35
<PAGE>
(i) merger, consolidation or statutory share exchange of the Fund with
or into any other corporation;
(ii) issuance of any securities of the Fund to any person or entity
for cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets having
an aggregate market value of less than $1,000,000); or
(iv) sale, lease or exchange to the Fund, in exchange for securities
of the Fund, of any assets of any entity or person (except assets
having an aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a 'Principal Shareholder'). A similar vote also would be required for
any amendment of the Articles of Incorporation to convert the Fund to an
open-end investment company by making any class of the Fund's capital stock a
'redeemable security,' as that term is defined in the 1940 Act. Such vote would
not be required with respect to any of the foregoing transactions, however,
when, under certain conditions, the Board of Directors approves the transaction,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets or the
conversion of the Fund to an open-end investment company, the affirmative vote
of the holders of a majority of the outstanding shares of the Fund's capital
stock would nevertheless be required. Reference is made to the Articles of
Incorporation of the Fund, on file with the SEC, for the full text of these
provisions.
The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its shares could have the
effect of depriving the stockholders of opportunities to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. See
'Description of Capital Stock--Stock Repurchases and Tender Offers.' The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a Principal Shareholder. They provide,
however, the advantage of potentially requiring persons seeking control of the
Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's management, investment objectives and
policies. The Board of Directors of the Fund has considered the foregoing
anti-takeover provisions and concluded that they are in the best interest of the
Fund and its stockholders.
36
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, serves as custodian of the Fund's assets. Brown Brothers Harriman & Co.
employs foreign subcustodians approved by the Fund's Board of Directors, in
accordance with applicable requirements under the 1940 Act, to provide custody
of the Fund's foreign assets. PNC Bank, National Association, whose principal
business address is Broad and Chestnut Streets, Philadelphia, Pennsylvania
19110, is the Fund's transfer and dividend disbursing agent and registrar.
FURTHER INFORMATION
Further information concerning these securities and the Fund may be found
in the Registration Statement on file with the SEC of which this Prospectus and
the Fund's SAI constitute a part.
The Table of Contents for the SAI is as follows:
<TABLE>
<S> <C>
Investment Policies and Restrictions................... 2
Strategic Transactions................................. 6
Directors and Officers................................. 15
Control Persons and Principal Holders of Securities.... 20
Investment Advisory Arrangements....................... 20
Portfolio Transactions................................. 22
Valuation of Common Stock.............................. 23
Taxation............................................... 24
Additional Information................................. 27
Financial Information.................................. 28
</TABLE>
37
<PAGE>
APPENDIX
RATINGS
DESCRIPTION OF MOODY'S RATINGS FOR CORPORATE AND CONVERTIBLE BONDS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protection
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA. Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appears adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during 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.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P RATINGS FOR CORPORATE AND CONVERTIBLE DEBT SECURITIES
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
38
<PAGE>
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces 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. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B. Debt rated B has a greater vulnerability to default but currently has
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. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC. Debt rated CCC has a currently identifiable vulnerability to default,
and is 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, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC. The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C. The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-). The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR. '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.
39
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR PAINEWEBBER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fund Expenses.............................. 2
Prospectus Summary......................... 3
Financial Highlights....................... 11
The Fund................................... 12
The Offering............................... 12
Use of Proceeds............................ 12
Trading History............................ 12
Investment Objectives and Policies......... 13
Other Investment Practices................. 18
Special Considerations and Risk Factors.... 23
Management of the Fund..................... 29
Dividends and Other Distributions;
Dividend Reinvestment Plan............... 30
Taxation................................... 32
Description of Capital Stock............... 33
Custodian, Transfer and Dividend
Disbursing Agent and Registrar........... 37
Further Information........................ 37
Appendix................................... 38
</TABLE>
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(Copyright)1996 PaineWebber Incorporated
[LOGO] Printed on Recycled Paper
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GLOBAL HIGH INCOME
DOLLAR FUND INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
PAINEWEBBER INCORPORATED
--------------------
MARCH 1, 1996
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<PAGE>
GLOBAL HIGH INCOME
DOLLAR FUND INC.
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
Global High Income Dollar Fund Inc. (the 'Fund') is a non-diversified,
closed-end management investment company. The Fund's primary investment
objective is to achieve a high level of current income. As a secondary objective
the Fund seeks capital appreciation, to the extent consistent with its primary
objective. No assurance can be given that the Fund will be able to achieve its
investment objectives.
Shares of the Fund's common stock ('Common Stock') may be offered from time
to time in order to effect over-the-counter ('OTC') secondary market sales by
PaineWebber Incorporated ('PaineWebber') in its capacity as a dealer and
secondary market-maker. PaineWebber may (but is not obligated) to make such a
secondary market.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly
owned subsidiary of PaineWebber, serves as investment adviser and administrator
of the Fund. This Statement of Additional Information ('SAI') is not a
prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated March 1, 1996. Capitalized terms not otherwise defined herein
have the same meaning as in the Prospectus. A copy of the Prospectus may be
obtained by calling any PaineWebber investment executive or correspondent firm
or by calling toll-free (800) 852-4750.
The date of this Statement of Additional Information is March 1, 1996.
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
CONVERTIBLE SECURITIES
The value of a convertible security is a function of its 'investment value'
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
'conversion value' (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
A convertible security might be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Any of these
actions could have an adverse effect on the Fund's ability to achieve its
investment objectives.
ILLIQUID SECURITIES
Illiquid securities may, but do not necessarily, include certain restricted
securities. To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the Securities and Exchange Commission
('SEC') has adopted Rule 144A under the Securities Act of 1933 ('1933 Act').
Rule 144A establishes a 'safe harbor' from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable values for restricted securities
and the ability to liquidate an investment. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The Fund may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by the Fund.
The assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
2
<PAGE>
The Board of Directors has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins pursuant to guidelines approved
by the Board. Mitchell Hutchins will take into account a number of factors in
reaching liquidity decisions, including but not limited to (1) the frequency of
trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers for the security and (5)
the nature of the security and how trading is effected (e.g., the time needed to
sell the security, how bids are solicited and the mechanics of transfer).
Mitchell Hutchins will monitor the liquidity of restricted securities in the
Fund's portfolio and report periodically on such decisions to the Board of
Directors.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund would purchase
securities from a bank or recognized securities dealer and simultaneously commit
to resell those securities to the bank or dealer at an agreed-upon date and
price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. The Fund would maintain custody of the
underlying securities prior to their repurchase; thus, the obligation of the
bank or securities dealer to pay the repurchase price on the date agreed to
would, in effect, be secured by such securities. If the value of such securities
were less than the repurchase price, plus any agreed-upon additional amount, the
other party to the agreement would be required to provide additional collateral
so that at all times the collateral is at least equal to the repurchase price,
plus any agreed-upon additional amount. The difference between the total amount
to be received upon repurchase of the securities and the price which was paid by
the Fund upon acquisition would be accrued as interest and included in the
Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
the repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's Board of Directors. Mitchell Hutchins will review and
monitor the creditworthiness of such institutions under the Board's general
supervision.
INVESTMENT LIMITATIONS
The following fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund, or (b) 67% or more of such shares present at a stockholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or the amount of total
assets will not be considered a violation of any of the following limitations or
of any of the Fund's investment policies. Under the Fund's current fundamental
investment limitations, the Fund may not:
(1) issue senior securities (including borrowing money from banks and
other entities and through reverse repurchase agreements) in excess of
33 1/3% of its total assets (including the amount of senior securities
issued, but reduced by any liabilities and indebtedness not constituting
senior securities), except that the Fund may borrow up to an additional 5%
of its total assets (not including the amount borrowed) for temporary or
emergency purposes;
(2) make an investment in any one industry if the investment would
cause the aggregate value of all investments in such industry to equal 25%
or more of the Fund's total assets; provided that this limitation
3
<PAGE>
does not apply to investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities;
(3) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions and except that the Fund
may make margin deposits in connection with its use of options, futures
contracts, options on futures contracts, forward currency contracts and
other financial instruments;
(4) engage in the business of underwriting securities of other
issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under federal
securities laws and except that the Fund may write options;
(5) make short sales of securities or maintain a short position,
except that the Fund may maintain short positions in connection with its
use of options, futures contracts, options on futures contracts and forward
currency contracts;
(6) purchase or sell real estate (including real estate limited
partnership interests), provided that the Fund may invest in securities
secured by, or issued by companies that invest in, real estate or interest
therein;
(7) purchase or sell commodities or commodity contracts, except that
the Fund may sell commodities received upon the exercise of warrants, may
purchase or sell financial and currency futures contracts and options
thereon, may purchase and sell forward contracts, may engage in
transactions in foreign currencies and may purchase or sell options on
foreign currencies;
(8) invest in oil, gas or mineral-related programs or leases; or
(9) make loans, except through loans of portfolio instruments and
repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests
therein and investment in government obligations, short-term commercial
paper, certificates of deposit and bankers' acceptances shall not be deemed
to be the making of a loan.
At the annual meeting of shareholders scheduled for April 11, 1996,
shareholders will be asked to approve changes to the Fund's fundamental
investment restrictions. If approved, the following investment restrictions will
supersede and replace the restrictions enumerated above.
The Fund will not:
(1) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities.
(2) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Fund's total assets
(including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance
or borrowing, except that the fund may borrow up to an additional 5% of its
total assets (not including the amount borrowed) for temporary or emergency
purposes.
(3) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures or other debt securities
or instruments, or participations or other interests therein and
investments in government obligations,
4
<PAGE>
commercial paper, certificates of deposit, bankers' acceptances or similar
instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other
issuers, except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with its
disposition of portfolio securities.
(5) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation,
and except that the Fund may exercise rights under agreements relating to
such securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real
estate can be liquidated in an orderly manner.
(6) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the Fund may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
If the foregoing fundamental restrictions are approved by the Fund's
shareholders, the Fund would become subject to the non-fundamental investment
restrictions listed below. These non-fundamental restrictions would replace
certain of the Fund's current fundamental restrictions.
The following investment restrictions are not fundamental and may be
changed by the Fund's board of directors without shareholder approval.
The Fund will not:
o purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that
the Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative
instruments.
o engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short 'against the box' and (b)
maintain short positions in connection with its use of financial
options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative
instruments.
o invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest
in such programs or leases and investments in asset-backed
securities supported by receivables generated from such programs or
leases are not subject to this prohibition.
5
<PAGE>
STRATEGIC TRANSACTIONS
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ('Hedging Instruments'), including options, futures
contracts (sometimes referred to as 'futures'), options on futures contracts,
forward currency contracts and interest rate protection transactions, to attempt
to hedge the Fund's portfolio. The Fund also may use options and forward
currency contracts to attempt to enhance income and realize gains, and use
foreign currency futures contracts and options on futures contracts for such
other purposes to the extent permitted by the Commodity Futures Trading
Commission ('CFTC').
Hedging strategies can be broadly categorized as 'short hedges' and 'long
hedges.' A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition to the exercise price plus the premium paid and transaction costs.
Alternatively, the Fund might be able to offset the price increase by closing
out an appreciated call option and realizing a gain.
The Fund may purchase and write (sell) covered straddles on securities or
indices of debt securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where the
exercise price of the put is less than or equal to the exercise price of the
call. The Fund would enter into a long straddle when Mitchell Hutchins believes
that it is likely that interest rates will be more volatile during the term of
the option than the option pricing implies. A short straddle is a combination of
a call and a put written on the same security where the exercise price of the
put is less than or equal to the exercise price of the call. The Fund would
enter into a short straddle when Mitchell Hutchins believes that it is unlikely
that interest rates will be as volatile during the term of the options as the
option pricing implies.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded and
the CFTC. In addition, the Fund's ability to use Hedging Instruments will be
limited by tax considerations. See 'Taxation.'
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins expects additional opportunities to develop in
connection with options, futures contracts, forward currency contracts and other
hedging techniques. These new opportunities may become available as Mitchell
Hutchins
6
<PAGE>
develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new options, futures contracts, forward currency
contracts or other techniques are developed. Mitchell Hutchins may utilize these
opportunities to the extent that they are consistent with the Fund's investment
objectives and permitted by the Fund's investment limitations and applicable
regulatory authorities.
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special considerations and risks,
as described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities, currencies and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. While Mitchell Hutchins is experienced
in the use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts to make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of the other party to the transaction ('contra party') to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Fund.
COVER FOR HEDGING STRATEGIES
Transactions using Hedging Instruments, other than purchased options,
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either (1) an offsetting ('covered')
position in securities, currencies or other options, futures contracts or
forward currency contracts or
7
<PAGE>
(2) cash and liquid short-term debt securities, with a value sufficient at all
times to cover its potential obligations to the extent not covered as provided
in (1) above. The Fund will comply with SEC guidelines regarding cover for
hedging transactions and will, if the guidelines so require, set aside cash,
U.S. government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet current obligations.
OPTIONS
The Fund may purchase put and call options, and write (sell) covered put
and call options, on debt securities, on indices of debt securities and foreign
currencies. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing covered put or call
options can enable the Fund to enhance income by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option the Fund has written declines to less than the exercise
price of the option, minus the premium received, the Fund would expect to suffer
a loss. Writing covered call options serves as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. All or a portion of the assets
used as cover for OTC options written by the Fund would be considered illiquid.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, the
Fund may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction.
Generally, the OTC debt and foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
8
<PAGE>
The Fund's ability to establish the close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the contra
party, the Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
The Fund may purchase and write put and call options on indices of debt
securities in much the same manner as the more traditional options discussed
above, except that index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
FUTURES
The Fund may purchase and sell interest rate futures contracts, bond index
futures contracts and foreign currency futures contracts. The Fund may also
purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities or
indices. Similarly, writing covered put options on futures contracts can serve
as a limited long hedge.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
the Fund, the Fund may sell an interest rate futures contract or a call option
thereon, or purchase a put option on that futures contract. If Mitchell Hutchins
wishes to lengthen the average duration of the Fund, the Fund may buy an
interest rate futures contract or a call option thereon, or sell a put option
thereon.
The Fund may also write put options on interest rate futures contracts
while at the same time purchasing call options on the same futures contracts in
order synthetically to create a long futures contract position. Such options
would have the same strike prices and expiration dates. The Fund will engage in
this strategy only when it is more advantageous to the Fund than is purchasing
the futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing an option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment.
9
<PAGE>
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures or written option position varies, a
process known as 'marking to market.' Variation margin does not involve
borrowing, but rather represents a daily settlement of the Fund's obligations
with respect to an open futures or options position. When the Fund purchases an
option on a future, the premium paid plus transaction costs is all that is at
risk. In contrast, when the Fund purchases or sells a futures contract or writes
an option thereon, it is subject to daily variation calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or options position due to
the absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to market
risk with respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options might not correlate
perfectly with movements in the prices of the investments being hedged. For
example, all participants in the futures and options markets are subject to
daily variation margin calls and might be compelled to liquidate futures or
options positions whose prices are moving unfavorably to avoid being subject to
further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities markets, there might be increased participation by speculators in
the futures markets. This participation also might cause temporary price
distortions. In addition, activities of large traders in both the futures and
securities markets involving arbitrage, 'program trading' and other investment
strategies might result in temporary price distortions.
GUIDELINE FOR FUTURES AND OPTIONS
To the extent the Fund enters into futures contracts, options on futures
positions and options on foreign currencies traded on a commodities exchange,
which are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on those positions (excluding the amount
by which options are 'in-the-money') may not exceed 5% of the Fund's net assets.
This guideline may be modified by the Fund's Board of Directors without a
shareholder vote. Adoption of this guideline cannot be guaranteed to limit the
percentage of the Fund's assets at risk to 5%.
10
<PAGE>
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS
The Fund may use options and futures on foreign currencies, as described
above, and foreign currency forward contracts, as described below, to hedge
against movements in the values of the foreign currencies in which the Fund's
securities are denominated. Such currency hedges can protect against price
movements in a security that the Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on other currencies, the
values of which Mitchell Hutchins believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Hedging Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Hedging Instruments, the
Fund could be disadvantaged by having to deal in the odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. Such transactions may serve as long hedges--for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges--for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
As noted above, the Fund may seek to hedge against changes in the value of
a particular currency by using forward contracts on another foreign currency or
a basket of currencies, the value of which Mitchell Hutchins believes will have
a positive correlation to the values of the currency being hedged. In addition,
the Fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if the Fund
owned securities denominated in a foreign currency and Mitchell Hutchins
believes that
11
<PAGE>
currency would decline relative to another currency, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second foreign currency. Transactions that use
two foreign currencies are sometimes referred to as 'cross hedging.' Use of a
different foreign currency magnifies the risk that movements in the price of
hedging instruments will not correlate or will correlate unfavorably with the
foreign currency being hedged.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in securities denominated in the foreign
currency or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts or maintain a net
exposure to such contracts only if (1) the consummation of the contracts would
not obligate the Fund to deliver an amount of foreign currency in excess of the
value of the position being hedged by such contracts or (2) the Fund maintains
cash, U.S. government securities or liquid, high-grade debt securities in a
segregated account in an amount not less than the value of its total assets
committed to the consummation of the contract and not covered as provided in (1)
above, as marked to market daily.
The Fund may use the following Hedging Instruments:
OPTIONS ON DEBT SECURITIES AND CURRENCIES--A call option is a contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security or currency underlying the option at a specified price
at any time during the term, or upon the expiration, of the option. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option, to deliver the underlying security or currency against payment of
the exercise price. A put option is a similar contract that gives its purchaser,
in return for a premium, the right to sell the underlying security or currency
at a specified price during the option term or upon expiration. The writer of
the put option, who receives the premium, has the obligation, upon
12
<PAGE>
exercise, to buy the underlying security or currency at the exercise price.
Options on debt securities are traded primarily in the OTC market rather than on
any of the several options exchanges.
OPTIONS ON INDICES OF DEBT SECURITIES--An index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payment and do not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
index.
DEBT SECURITY INDEX FUTURES CONTRACTS--A debt security index futures
contract is a bilateral agreement pursuant to which one party agrees to accept
and the other party agrees to make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the debt securities comprising the
index is made; generally contracts are closed out prior to the expiration date
of the contract.
DEBT SECURITY AND CURRENCY FUTURES CONTRACTS--A debt security or currency
futures contract is a bilateral agreement pursuant to which one party agrees to
accept and the other party agrees to make delivery of the specific type of debt
security or currency called for in the contract at a specified future time and
at a specified price.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accomplished by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
INTEREST RATE PROTECTION TRANSACTIONS--The Fund may enter into interest
rate protection transactions, including interest rate swaps and interest rate
caps, collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, respectively, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the 'notional principal amount') for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated ceiling level or goes below
a designated floor on predetermined dates or during a specified time period.
The Fund expects to enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date or to effectively fix the rate of
interest that it pays on one or more borrowings or series of borrowings. The
Fund intends to use these transactions as a hedge and not as a speculative
investment. Interest rate protection transactions are subject to risks
comparable to those described above with respect to other hedging strategies.
13
<PAGE>
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate protection transactions are entered
into for good faith hedging purposes, and inasmuch as segregated accounts will
be established with respect to such transactions, Mitchell Hutchins and the Fund
believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and an
amount of cash, U.S. government securities or other liquid, high-grade debt
obligations having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act of 1940 ('1940 Act'). The Fund
also will establish and maintain such segregated accounts with respect to its
total obligations under any interest rate swaps that are not entered into on a
net basis and with respect to any interest rate caps, collars and floors that
are written by the Fund.
The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers or their affiliates believed by Mitchell
Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's Board of Directors. If there is a default by the other
party to such a transaction, the Fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
14
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION
WITH THE PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS* FUND DURING PAST FIVE YEARS
- ----------------------------- --------- ------------------------------------
<S> <C> <C>
Richard Q. Armstrong; 60 Director Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and principal
occupation since March 1995). Mr.
Armstrong is also a director of Hi
Lo Automotive, Inc. He was
chairman of the board, chief
executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a partner
of the New England Consulting
Group (management consulting firm)
(December 1992-September 1993). He
was managing director of LVMH U.S.
Corporation (U.S. subsidiary of
the French luxury goods
conglomerate, Luis Vuitton Moet
Hennessey Corporation) (1987-1991)
and chairman of its wine and
spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr.
Armstrong is also a director or
trustee of six other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.; 69** Director Mr. Bewkes is a director of, and
and consultant to, Paine Webber Group
Chairman Inc. ('PW Group') (holding company
of the of PaineWebber and Mitchell
Board of Hutchins). Prior to 1988, he was
Directors chairman of the board, president
and chief executive officer of
American Bakeries Company. Mr.
Bewkes is also a director of
Interstate Bakeries Corporation
and NaPro Bio-Therapeutics, Inc.
and a director or trustee of 24
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITION
WITH THE PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS* FUND DURING PAST FIVE YEARS
- ----------------------------- --------- ------------------------------------
<S> <C> <C>
Richard R. Burt; 49 Director Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity Partners
Washington, D.C. 20036 (international investments and
consulting firm) (since March
1994) and a partner of McKinsey &
Company (management consulting
firm) (since 1991). He is also a
director of American Publishing
Company. He was the chief
negotiator in the Strategic Arms
Reduction Talks with the former
Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is also a director or
trustee of seven other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
John R. Torell III; 56 Director Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial
Suite 4605 advisory firm) (since 1989),
New York, NY 10153 chairman of Telesphere Corporation
(electronic provider of financial
information) and a partner of
Zilkha & Company (merchant banking
and private investment company).
He is the former chairman and
chief executive officer of Fortune
Bancorp (1990-1991 and 1990-1994,
respectively), the former
chairman, president and chief
executive officer of CalFed, Inc.
(savings association) (1988 to
1989) and former president of
Manufacturers Hanover Corp. (bank)
(prior to 1988). Mr. Torell is
also a director of American Home
Products Corp., New Colt Inc.
(armament manufacturer) and Volt
Information Sciences Inc. Mr.
Torell is a director or trustee of
seven other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
William D. White; 62 Director Mr. White is retired. From February
P.O. Box 199 1989 through March 1994, he was
Upper Black Eddy, PA 18972 president of the National League
of Professional Baseball Clubs.
Prior to 1989, he was a television
sportscaster for WPIX-TV, New
York. Mr. White is a director or
trustee of nine other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION
WITH THE PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS* FUND DURING PAST FIVE YEARS
- ----------------------------- --------- ------------------------------------
<S> <C> <C>
Margo N. Alexander; 49 President Mrs. Alexander is president, chief
executive officer and a director
of Mitchell Hutchins (since
January 1995). Mrs. Alexander is
an executive vice president and
director of PaineWebber. Mrs.
Alexander is also a director or
trustee of three investment
companies and president of 29
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Teresa M. Boyle; 37 Vice Ms. Boyle is a first vice president
President and manager--advisory
administration of Mitchell
Hutchins. Prior to November 1993,
she was compliance manager of
Hyperion Capital Management, Inc.,
an investment advisory firm. Prior
to April 1993, Ms. Boyle was a
vice president and manager--legal
administration of Mitchell
Hutchins. Ms. Boyle is also a vice
president of 29 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Joan L. Cohen; 31 Vice Ms. Cohen is a vice president and
President attorney of Mitchell Hutchins.
and Prior to December 1993, she was an
Assistant associate at the law firm of
Secretary Seward & Kissel. Ms. Cohen is also
a vice president and assistant
secretary of 24 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
C. William Maher; 34 Vice Mr. Maher is a first vice president
President and a senior manager of the mutual
and fund finance division of Mitchell
Assistant Hutchins. Mr. Maher is also a vice
Treasurer president and assistant treasurer
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dennis McCauley; 49 Vice Mr. McCauley is a managing director
President and chief investment
officer--fixed income of Mitchell
Hutchins. Prior to December 1994,
he was director of fixed income
investments of IBM Corporation.
Mr. McCauley is also a vice
president of 17 other investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION
WITH THE PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS* FUND DURING PAST FIVE YEARS
- ----------------------------- --------- ------------------------------------
<S> <C> <C>
Ann E. Moran; 38 Vice Ms. Moran is a vice president of
President Mitchell Hutchins. Ms. Moran is
and also a vice president and
Assistant assistant treasurer of 29 other
Treasurer investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dianne E. O'Donnell; 43 Vice Ms. O'Donnell is a senior vice
President president and deputy general
and counsel of Mitchell Hutchins. Ms.
Secretary O'Donnell is also a vice president
and secretary of 29 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 45 Vice Ms. Schonfeld is a managing director
President and general counsel of Mitchell
Hutchins. From April 1990 to May
1994, she was a partner in the law
firm of Arnold & Porter. Ms.
Schonfeld is also a vice president
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Paul H. Schubert; 33 Vice Mr. Schubert is a first vice
President president and a senior manager of
and the mutual fund finance division
Assistant of Mitchell Hutchins. From August
Treasurer 1992 to August 1994, he was a vice
president at BlackRock Financial
Management, Inc. Prior to August
1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is
also a vice president and
assistant treasurer of 29 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Julian F. Sluyters; 35 Vice Mr. Sluyters is a senior vice
President president and the director of the
and mutual fund finance division of
Treasurer Mitchell Hutchins. Prior to 1991,
he was an audit senior manager
with Ernst & Young LLP. Mr.
Sluyters is also a vice president
and treasurer of 29 other
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION
WITH THE PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS* FUND DURING PAST FIVE YEARS
- ----------------------------- --------- ------------------------------------
<S> <C> <C>
Gregory K. Todd; 39 Vice Mr. Todd is a first vice president
President and associate general counsel of
and Mitchell Hutchins. Prior to 1993,
Assistant he was a partner in the law firm
Secretary of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice
president and assistant secretary
of 29 other investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Stuart Waugh; 40 Vice Mr. Waugh is a managing director and
President a portfolio manager of Mitchell
Hutchins responsible for global
fixed income investments and
currency trading. Mr. Waugh is
also a vice president of four
other investment companies for
which Mitchell Hutchins serves as
investment adviser.
Keith A. Weller; 34 Vice Mr. Weller is a first vice president
President and associate general counsel of
and Mitchell Hutchins. From September
Assistant 1987 to May 1995, he was an
Secretary attorney in private practice. Mr.
Weller is also a vice president
and assistant secretary of 23
other investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an 'interested person' of the Fund, as defined in the 1940 Act,
by reason of his position with PW Group.
The Fund pays directors who are not 'interested persons' of the Fund $1,500
annually and $250 per meeting of the Board of Directors or any committee
thereof. Directors also are reimbursed for any expenses incurred in attending
meetings. Because Mitchell Hutchins performs substantially all of the services
necessary for the operation of the Fund, the Fund requires no employees. No
officer, director or employee of PaineWebber or Mitchell Hutchins presently
receives any compensation from the Fund for acting as a director or officer. In
February 1996, the Board acted to establish the size of the Board at ten. An
election of all ten nominees is scheduled to take place at the Fund's annual
meeting of shareholders on April 11, 1996. The table below includes certain
information relating to the compensation of the Fund's directors.
19
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
AGGREGATE FUND AND THE
COMPENSATION FUND COMPLEX
FROM THE PAID TO
NAME OF PERSON, POSITION FUND* DIRECTORS+
- ------------------------------ ------------ ------------
<S> <C> <C>
Richard Q. Armstrong,
Director.................... $1,125 $ 9,000
Richard R. Burt,
Director.................... $ 875 $ 7,750
John R. Torell III,
Director.................... $3,250 $ 28,125
William D. White,
Director.................... $3,250 $ 33,125
</TABLE>
- ------------------
* Represents fees paid to each director during the fiscal year ended October 31,
1995; the Fund does not have a pension or retirement plan.
+ Represents total compensation paid to each director by the Fund Complex during
the twelve months ended December 31, 1995.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 2, 1996, Cede & Co. (the nominee for The Depository Trust
Company) owned of record 22,205,008 shares of the Common Stock or 97.66% of the
outstanding Common Stock. To the knowledge of the Fund, no person is the
beneficial owner of 5% or more of its Common Stock. As of February 2, 1996, the
directors and officers of the Fund beneficially owned less than 1% of the
outstanding shares of Common Stock.
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated September 30, 1993 with the Fund ('Advisory
Contract'). Pursuant to the Advisory Contract, Mitchell Hutchins provides a
continuous investment program for the Fund and makes investment decisions and
places orders to buy, sell or hold particular securities. As administrator,
Mitchell Hutchins supervises all matters relating to the operation of the Fund
and obtains for it corporate, administrative and clerical personnel, office
space, equipment and services, including arranging for the periodic preparation,
updating, filing and dissemination of proxy materials, tax returns and reports
to the Fund's Board of Directors, stockholders and regulatory authorities.
In addition to the payments to Mitchell Hutchins under the Advisory
Contract described in the Prospectus, the Fund pays certain other costs,
including (1) the costs (including brokerage commissions) of securities
purchased or sold by the Fund and any losses incurred in connection therewith;
(2) expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses of the Fund, whether or not advanced by Mitchell
Hutchins; (4) filing fees and expenses relating to the registration and
qualification of the Common Stock under federal and state securities laws; (5)
fees and salaries payable to directors who are not interested persons of the
Fund or Mitchell Hutchins; (6) all expenses incurred in connection with the
directors' services, including travel
20
<PAGE>
expenses; (7) taxes (including any income or franchise taxes) and governmental
fees; (8) costs of any liability, uncollectible items of deposit and any other
insurance or fidelity bonds; (9) any costs, expenses or losses arising out of a
liability of or claims for damages or other relief asserted against the Fund for
violation of any law; (10) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent directors; (11) charges of
custodians, transfer agents and other agents; (12) costs of preparing share
certificates; (13) expenses of printing and distributing reports to
stockholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the Fund; (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of stockholders, the Board and any committees thereof; (17) the costs
of investment company literature and other publications provided to directors
and officers; (18) costs of mailing, stationery and communications equipment;
(19) interest charges on borrowings; and (20) fees and expenses of listing and
maintaining any listing of the Fund's shares on the New York Stock Exchange
('NYSE') or any other national securities exchange.
The Advisory Contract was approved by the Fund's Board of Directors and by
a majority of the directors who are not parties to the Advisory Contract or
interested persons of any such party ('Independent Directors') on June 23, 1993
and by its initial stockholder on September 27, 1993. Unless sooner terminated,
the Advisory Contract will continue automatically for successive annual periods,
provided that such continuance is specifically approved at least annually (1) by
a majority vote of the Independent Directors cast in person at a meeting called
for the purpose of voting on such approval; and (2) by the Board of Directors or
by vote of a majority of the outstanding voting securities of the Fund.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in
the performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. The Advisory Contract is terminable by
vote of the Board of Directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to Mitchell Hutchins. The Advisory Contract may also be
terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The
Advisory Contract terminates automatically upon its assignment.
For the period October 8, 1993 (commencement of operations) to October 31,
1993, for the fiscal year ended October 31, 1994 and for the fiscal year ended
October 31, 1995, the Fund paid or accrued to Mitchell Hutchins $237,527,
$3,911,266 and $3,540,880, respectively, in investment advisory and
administration fees.
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber, PaineWebber/Kidder, Peabody and Mitchell
Hutchins/Kidder, Peabody mutual funds (collectively, 'PW Funds') and other
Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by PW
Funds and other Mitchell Hutchins advisory clients.
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<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, Mitchell
Hutchins is responsible for the execution of the Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for the
Fund, taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of the order, difficulty of
execution and operational facilities of the firm involved. Generally, debt
securities are traded on the OTC market on a 'net' basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers generally include a 'spread,' which is the difference
between the prices at which the dealer is willing to purchase and sell a
specific security at the time.
The Fund will have no obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The Fund contemplates that,
consistent with obtaining the best net results, brokerage transactions may be
conducted through Mitchell Hutchins or any of its affiliates, including
PaineWebber. The Fund's Board of Directors has adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid
to Mitchell Hutchins or any of its affiliates are reasonable and fair. Specific
provisions in the Advisory Contract authorize Mitchell Hutchins and any
affiliate thereof which is a member of a national securities exchange to effect
portfolio transactions for the Fund on such exchange and to retain compensation
in connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.
Transactions in futures contracts are executed through futures commission
merchants ('FCMs') who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Fund's transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities. For the period October 8, 1993 (commencement of
operations) to October 31, 1993 and for the fiscal years ended October 31, 1994
and October 31, 1995, the Fund paid no commissions to FCMs.
Consistent with the Fund's interests and subject to the review of the Board
of Directors, Mitchell Hutchins may cause the Fund to purchase and sell
portfolio securities from and to dealers, or through brokers which provide the
Fund with research, analysis, advice and similar services. In return for such
services, the Fund may pay to those brokers a higher commission than may be
charged by other brokers, provided that Mitchell Hutchins determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins to the Fund
and its other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term. For
purchases or sales with broker-dealer firms which act as principal, Mitchell
Hutchins seeks best execution. Although Mitchell Hutchins may receive certain
research or execution services in connection with these transactions, Mitchell
Hutchins will not purchase securities at a higher price or sell securities at a
lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins will not
enter into any explicit soft dollar arrangements relating to principal
transactions and will not receive in principal transactions the types of
services which could be purchased for hard dollars. Mitchell Hutchins may engage
in agency transactions in OTC equity and debt securities in return for research
and execution services. These transactions are entered into only in compliance
with procedures ensuring that the transaction (including commissions) is at
least as favorable as it would have been if effected directly with a
market-maker that did not provide research or execution services. These
procedures include Mitchell Hutchins receiving multiple quotes from dealers
before executing the transaction on an agency basis.
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<PAGE>
Research services furnished by dealers or brokers with or through which the
Fund effects securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts and, conversely, research services furnished to
Mitchell Hutchins by dealers or brokers in connection with other funds or
accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in advising
the Fund. Information and research received from such brokers or dealers will be
in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Advisory Contract.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins will be made independently of each other in the light of
differing considerations for the various accounts. The same investment decision,
however, may occasionally be made for the Fund and one or more of such accounts.
In such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the Fund and such other
account(s) as to amount according to a formula deemed equitable to the Fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Fund is concerned
or upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which Mitchell Hutchins or any of its affiliates is a member of the underwriting
or selling group except pursuant to the procedures adopted by the Fund's Board
of Directors in conformity with Rule 10f-3 under the 1940 Act. Among other
things, these procedures require that the commission or spread paid in
connection with such a purchase be reasonable and fair, that the purchase be at
not more than the public offering price prior to the end of the first business
day after the date of the public offering and that Mitchell Hutchins and its
affiliates not participate in or benefit from the sale to the Fund.
For the period October 8, 1993, (commencement of operations) to October 31,
1993 and for the fiscal years ended October 31, 1994 and October 31, 1995,
Mitchell Hutchins did not direct any brokerage commissions to brokers chosen
because they provided research and analysis. For the period October 8, 1993
(commencement of operations) to October 31, 1993 and for the fiscal years ended
October 31, 1994 and October 31, 1995, the Fund paid no brokerage commissions.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate may vary from year to year and will not
be a limiting factor when Mitchell Hutchins deems portfolio changes appropriate.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of the long-term securities in the portfolio
during the year. For the fiscal years ended October 31, 1994 and October 31,
1995, the Fund's portfolio turnover rate was 51% and 71%, respectively.
VALUATION OF COMMON STOCK
The net asset value of the Common Stock will be determined weekly as of the
close of regular trading on the NYSE on the last day of the week on which the
NYSE is open for trading. The net asset value of the Common Stock also is
determined monthly at the close of regular trading on the NYSE on the last day
of the month on which the NYSE is open for trading. The net asset value per
share of Common Stock is computed by dividing the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received and earned discount) minus all liabilities
(including accrued expenses) by the total number of shares of Common Stock
outstanding at such time.
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<PAGE>
When market quotations are readily available, the Fund's debt securities
are valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions will
be valued based upon such quotations. Market quotations generally are not
available for options traded in the OTC market. When market quotations are not
readily available for any of the Fund's debt securities, such securities are
valued based upon appraisals received from a pricing service using a
computerized matrix system, or based upon appraisals derived from information
concerning the security or similar securities received from recognized dealers
in those securities. Notwithstanding the above, debt securities with maturities
of 60 days or less generally are valued at amortized cost if their original term
to maturity was 60 days or less, or by amortizing the difference between their
fair value as of the 61st day prior to maturity and their maturity value if
their original term to maturity exceeded 60 days, unless in either case the
Board of Directors or its delegate determines that this does not represent fair
value.
Securities and other instruments that are listed on U.S. and foreign stock
exchanges and for which market quotations are readily available are valued at
the last sale price on the exchange on which the securities are traded, as of
the close of business on the day the securities are being valued or, lacking any
sales on such day, at the last bid price available. In cases where securities or
other instruments are traded on more than one exchange, such securities or other
instruments generally are valued on the exchange designated by Mitchell Hutchins
under the direction of the Board of Directors as the primary market. Securities
traded in the OTC market and listed on Nasdaq are valued at the last available
sale price on Nasdaq prior to the time of valuation; other OTC equity securities
and instruments are valued at the last available bid price prior to the time of
valuation. Securities and other assets for which reliable market quotations are
not readily available (including restricted securities subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board of Directors.
All securities and other assets quoted in foreign currency and forward
currency contracts are valued weekly in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the Fund's custodian. Foreign currency exchange rates are generally determined
prior to the close of the NYSE. Occasionally, events affecting the value of
foreign securities and such exchange rates occur between the time at which they
are determined and the close of the NYSE, which events will not be reflected in
a computation of the Fund's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
The foreign currency exchange transactions of the Fund conducted on a spot basis
are valued at the spot rate for purchasing or selling currency prevailing on the
foreign exchange market. Under normal market conditions this rate differs from
the prevailing exchange rate by an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.
TAXATION
GENERAL
In order to continue to qualify for treatment as a regulated investment
company ('RIC') under the Internal Revenue Code, the Fund must distribute to its
stockholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
('Distribution Requirement') and must meet several additional requirements.
Among these requirements are the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the
24
<PAGE>
sale or other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward currency contracts) derived
with respect to its business of investing in securities or those currencies
('Income Requirement'); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months--options,
futures or forward currency contracts (other than those on foreign currencies),
or foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the Fund's principal business of investing in
securities (or options and futures with respect to securities) ('Short-Short
Limitation'); (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (4) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to stockholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
stockholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to the stockholders for the year in which that December 31 falls.
The Fund will be subject to a nondeductible 4% excise tax ('Excise Tax') to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
For purposes of the Excise Tax, any ordinary income or capital gain net income
retained by, and subject to federal income tax in the hands of, the Fund will be
treated as having been distributed.
FOREIGN TAXES
Interest and dividends on foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions that would reduce the yield on those securities. Tax
conventions between certain countries and the United States may reduce or
eliminate these taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors. If more than
50% of the value of the Fund's total assets at the close of any taxable year
consists of securities of foreign corporations, the Fund will be eligible to,
and may, file an election with the Internal Revenue Service that will enable its
stockholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign and U.S. possessions income taxes paid by the Fund for
that year. Pursuant to the election, the Fund would treat those taxes as
dividends paid to its stockholders and each stockholder would be required to (1)
include in gross income, and treat as paid by him, his proportionate share of
those taxes, (2) treat his share of those taxes and of any dividend paid by the
Fund that represents income from foreign or U.S. possessions sources as his own
income from those sources and (3) either deduct the taxes deemed paid by him in
computing his taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against his federal income tax. If the Fund
makes the election, it will report to its stockholders shortly after the end of
each taxable year their respective shares of the Fund's income from sources
within, and taxes paid to, foreign countries and U.S. possessions. Potential
investors should note, however, that the Fund may not satisfy the
above-referenced 50%-of-assets test and that, as a result, it may be unable to
make the election, with the consequence that foreign and U.S. possessions taxes
imposed on the Fund would not be deductible or creditable by its stockholders.
25
<PAGE>
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest a portion of its assets in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of debt securities issued or guaranteed by foreign governments. Certain of these
investments may constitute investments in 'passive foreign investment companies'
('PFICs'). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a RIC that holds stock of a
PFIC will be subject to federal income tax on a portion of any 'excess
distribution' received on the stock or of any gain on disposition of the stock
(collectively 'PFIC income'), plus interest thereon, even if the RIC distributes
the PFIC income as a taxable dividend to its stockholders. The balance of the
PFIC income will be included in the RIC's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its stockholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a 'qualified
electing fund,' then in lieu of the foregoing tax and interest obligation, the
Fund would be required to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)--which
most likely would have to be distributed to satisfy the Distribution Requirement
and to avoid imposition of the Excise Tax--even if those earnings and gain were
not received by the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
Pursuant to proposed regulations, closed-end RICs whose net asset value is
determined and published in a publication of general circulation at least
weekly, such as the Fund, would be entitled to elect to 'mark-to-market' their
stock in certain PFICs. 'Marking-to-market,' in this context, means recognizing
as gain for each taxable year the excess, as of the end of that year, of the
fair market value of such a PFIC's stock over the owner's adjusted basis in that
stock (including mark-to-market gain for each prior year for which an election
was in effect).
HEDGING STRATEGIES
The use of hedging strategies, such as writing (selling) and purchasing
options and futures and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains or losses the Fund recognizes in
connection therewith. These rules also may require the Fund to 'mark to market'
(that is, treat as sold for their fair market value) at the end of each taxable
year certain positions in its portfolio, which may cause the Fund to recognize
income without receiving cash with which to make distributions necessary to
satisfy the Distribution Requirement and to avoid imposition of the Excise Tax.
In that event, the Fund might have to liquidate securities to enable it to make
the required distributions, which would cause it to recognize gains or losses
and might affect its ability to satisfy the Short-Short Limitation.
Income from the disposition of foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward currency contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures and forward currency contracts on foreign
currencies, that are not directly related to the Fund's principal business of
investing in securities (or
26
<PAGE>
options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options, futures
and forward currency contracts beyond the time when it otherwise would be
advantageous to do so in order for the Fund to continue to qualify as a RIC.
ADDITIONAL INFORMATION
SHARE REPURCHASES AND TENDER OFFERS
As discussed in the Prospectus, the Fund's Board of Directors may tender
for Common Stock to reduce or eliminate the discount to net asset value at which
the Common Stock might trade. Even if a tender offer has been made, it will be
the Board's announced policy, which may be changed by the Board, not to accept
tenders or effect repurchases (or, if a tender offer has not been made, not to
initiate a tender offer) if: (1) such transactions, if consummated, would (a)
result in the delisting of the Common Stock from the NYSE (the NYSE having
advised the Fund that it would consider delisting if the aggregate market value
of the outstanding shares is less than $5,000,000, the number of publicly held
shares falls below 600,000 or the number of round-lot holders falls below
1,200), or (b) impair the Fund's status as a RIC (which would eliminate its
eligibility to deduct dividends paid to its stockholders, thus causing its
income to be fully taxed at the corporate level in addition to the taxation of
stockholders on distributions received from the Fund); (2) the Fund would not be
able to liquidate portfolio securities in an orderly manner and consistent with
the Fund's investment objectives and policies in order to repurchase the Common
Stock; or (3) there is, in the Board's judgment, any material (a) legal action
or proceeding instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Fund, (b) suspension of trading or
limitation on prices of securities generally on the NYSE or any foreign exchange
on which portfolio securities of the Fund are traded, (c) declaration of a
banking moratorium by federal, state or foreign authorities or any suspension of
payment by banks in the United States, New York State or foreign countries in
which the Fund invests, (d) limitation affecting the Fund or the issuers of its
portfolio securities imposed by federal, state or foreign authorities on the
extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States or other
countries in which the Fund invests or (f) other events or conditions that would
have a material adverse effect on the Fund or its stockholders if Common Stock
was repurchased. The Board of Directors may modify these conditions in light of
experience.
CUSTODIAN
Brown Brothers Harriman & Co., serves as custodian of the Fund's assets
held in the United States. Rules adopted under the 1940 Act permit the Fund to
maintain its securities and cash in the custody of certain eligible banks and
securities depositories. Pursuant to those rules, the Fund's portfolio of
securities and cash, when invested in securities of foreign countries, is held
by its subcustodians who are approved by the directors of the Fund in accordance
with the rules of the SEC. Selection of the subcustodians is made by the
directors of the Fund following a consideration of a number of factors,
including, but not limited to, the reliability and financial
27
<PAGE>
stability of the institution, the ability of the institution to capably perform
custodial services for the Fund, the reputation of the institution in its
national market and the political and economic stability of the countries in
which the subcustodians will be located. In addition, the 1940 Act requires that
foreign subcustodians, among other things, have shareholder equity in excess of
$200 million, have no lien on the Fund's assets and maintain adequate and
accessible records.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants.
LEGAL MATTERS
The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
N.W., Washington, D.C. 20036-1800, counsel to the Fund, has passed upon the
legality of the shares offered by the Fund's Prospectus. Kirkpatrick & Lockhart
LLP also acts as counsel to Mitchell Hutchins and PaineWebber in connection with
other matters.
FINANCIAL INFORMATION
The Fund's Annual Report to Shareholders for the fiscal year ended October
31, 1995 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent accountants appearing
therein are incorporated by reference in this SAI.
28
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS OTHER
THAN THOSE CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL
INFORMATION AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR PAINEWEBBER.
THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH THE PROSPECTUS RELATES. THE PROSPECTUS AND THIS
STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions.................. 2
Strategic Transactions................................ 6
Directors and Officers................................ 15
Control Persons and Principal Holders of Securities... 20
Investment Advisory Arrangements...................... 20
Portfolio Transactions................................ 22
Valuation of Common Stock............................. 23
Taxation.............................................. 24
Additional Information................................ 27
Financial Information................................. 28
</TABLE>
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(COPYRIGHT) 1996 PaineWebber Incorporated
Printed on Recycled Paper
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GLOBAL HIGH INCOME
DOLLAR FUND INC.
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STATEMENT OF ADDITIONAL
INFORMATION
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PAINEWEBBER INCORPORATED
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MARCH 1, 1996
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