As filed with the Securities and Exchange Commission on September 29, 1995
Securities Act File No. 33-64808
Investment Company Act File No. 811-7814
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM N-2
Registration Statement Under the Securities Act of 1933 /X/
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 3 /X/
and
Registration Statement Under the Investment Company Act of 1940 /X/
Amendment No. 6 /X/
(Check appropriate box or boxes)
_____________________
GLOBAL SMALL CAP FUND INC.
(Exact name of Registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (212) 713-2000
_____________________
DIANNE E. O'DONNELL, ESQ.
Vice President and Secretary
GLOBAL SMALL CAP FUND INC.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
_____________________
Copies to:
ROBERT A. WITTIE, ESQ. GREGORY K. TODD, ESQ.
DANIEL E. BURTON, ESQ. Mitchell Hutchins Asset
Kirkpatrick & Lockhart LLP Management Inc.
1800 M Street, N.W. 1285 Avenue of the Americas
Washington, D.C. 20036 New York, New York 10019
___________
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ X ]
It is proposed that this filing will become effective (check
appropriate box)
[ x ] when declared effective pursuant to Section 8(c)
This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.
Global Small Cap Fund Inc.
Form N-2 Cross Reference Sheet
<TABLE>
<CAPTION>
Part A
Item Number Caption Prospectus Caption
<S> <C> <C>
1 Outside Front Cover . . . . . . . . . . . . . Outside Front Cover of Prospectus
2 Inside Front and Outside Back Cover Page . . Inside Front and Outside Back Cover Page of
Prospectus
3 Fee Table and Synopsis . . . . . . . . . . . Fund Expenses; Prospectus Summary
4 Financial Highlights . . . . . . . . . . . . Financial Highlights
5 Plan of Distribution . . . . . . . . . . . . Outside Front Cover; The Offering;
Management of the Fund; Description of
Capital Stock
6 Selling Shareholders . . . . . . . . . . . . Not Applicable
7 Use of Proceeds . . . . . . . . . . . . . . . Use of Proceeds; Investment Objective and
Policies; Other Investment Practices
8 General Description of Registrant . . . . . Prospectus Summary; Trading History; The
Fund; Investment Objective and Policies;
Other Investment Practices; Special
Considerations and Risk Factors; Description
of Capital Stock
9 Management . . . . . . . . . . . . . . . . . Management of the Fund; Description of
Capital Stock; Custodian, Transfer and
Dividend Disbursing Agent and Registrar
10 Capital Stock, Long-Term Debt and Other Dividends and Other Distributions; Dividend
Securities . . . . . . . . . . . . . . . . . Reinvestment Plan; Taxation; Description of
Capital Stock
11 Defaults and Arrears on Senior Securities . . Not Applicable
12 Legal Proceedings . . . . . . . . . . . . . . Not Applicable
13 Table of Contents of the Statement of Further Information
Additional Information . . . . . . . . . . .
Part B
Item Number Caption Statement of Additional Information
14 Cover Page . . . . . . . . . . . . . . . . . Cover Page of Statement of Additional
Information
15 Table of Contents . . . . . . . . . . . . . . Outside Back Cover Page of Statement of
Additional Information
16 General Information and History . . . . . . . Not Applicable
17 Investment Objective and Policies . . . . . Investment Policies and Restrictions;
Hedging Strategies; Portfolio Transactions
18 Management . . . . . . . . . . . . . . . . . Directors and Officers
19 Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . . Control Persons and Principal Holders of
Securities
20 Investment Advisory and Other Services . . . Directors and Officers; Investment Advisory
Arrangements; Additional Information;
Management of the Fund (in Prospectus);
Custodian, Transfer and Dividend Disbursing
Agent and Registrar (in Prospectus)
21 Brokerage Allocation and Other Practices . . Portfolio Transactions
22 Tax Status . . . . . . . . . . . . . . . . . Taxation
23 Financial Statements . . . . . . . . . . . . Financial Statements
</TABLE>
<PAGE>
GLOBAL SMALL CAP FUND INC.
COMMON STOCK
------------------------
Global Small Cap Fund Inc. (the 'Fund') is a diversified, closed-end
management investment company. The Fund's investment objective is long-term
capital appreciation. To seek to achieve this objective, the Fund normally
invests primarily in equity securities of small capitalization ('small cap')
companies located throughout the world including, but not limited to, Asia,
Europe, the Far East, the Middle East, North Africa, and the Americas. For
purposes of the foregoing, small cap companies are companies that, at the time
of investment, have market capitalizations of $1 billion or less. No assurance
can be given that the Fund will achieve its investment objective.
Investment in the Fund involves special considerations and risks that are
not normally present in investments in funds that invest solely in the
securities of U.S. issuers. The Fund may invest in equity securities of foreign
companies located in emerging market countries. Many foreign securities markets
are characterized by a relatively small number of equity issues and low trading
volumes, resulting in comparatively greater price volatility and less liquidity.
See 'Special Considerations and Risk Factors.'
The Fund's common stock ('Common Stock') is listed and traded on the
American Stock Exchange, Inc. ('Amex') under the symbol 'GSG'. 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 Amex at the time of
sale. The closing price for the Common Stock on the Amex on September 13, 1995
was $9.00. See 'Trading History'. The Fund will not receive any proceeds from
the sale of the Common Stock offered pursuant to this Prospectus.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins') serves as the
Fund's investment adviser and administrator. GE Investment Management
Incorporated ('GEIM') serves as the Fund's sub-adviser. 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 November , 1995 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 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 November , 1995.
<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....... 1.00%
Other Expenses.................................... 0.69%
----
Total Annual Expenses........................ 1.69%
----
----
</TABLE>
- ------------------
(1) Prices for shares of Common Stock traded in the OTC 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
fiscal year ended July 31, 1995.
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 distributions at net asset value:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -------- ----------- ---------- ---------
<S> <C> <C> <C>
$17 $53 $ 92 $ 200
</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 the 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 this
Example assumes reinvestment of all dividends and other distributions at net
asset value, participants in the Fund's Dividend Reinvestment Plan ('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 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>
<S> <C>
The Fund.................. Global Small Cap Fund Inc. (the 'Fund') is a
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
American Stock Exchange, Inc. ('Amex') at the time
of sale. The Common Stock is listed and traded on
the Amex under the symbol 'GSG.' See 'The
Offering' and 'Trading History.'
Investment Objective and
Policies................ The Fund's investment objective is long-term capital
appreciation. To seek to achieve this objective,
the Fund normally invests at least 65% of its
total assets in equity securities of small
capitalization ('small cap') companies located
throughout the world including, but not limited
to, Asia, Europe, the Far East, the Middle East,
North Africa, and the Americas. For purposes of
the foregoing, 'small cap' companies are companies
that, at the time of investment, have market
capitalizations of $1 billion or less. While the
Fund is not restricted in the portion of its
assets which may be invested in a single country
or region, it is anticipated that, in normal
market conditions, the Fund's assets will be
invested in issuers in at least three countries.
In managing the Fund's portfolio, the Fund's
sub-adviser seeks to identify those small cap
companies, both in the United States and abroad,
which are likely to benefit from long-term trends
as they develop in the global economy. The Fund's
investment policies are designed to enable it to
capitalize on unique investment opportunities
presented throughout the world and in
international financial markets influenced by the
increasing interdependency of economic cycles and
currency exchange rates. The Fund may invest up to
35% of its total assets in other securities,
including equity securities of companies with
higher market capitalizations and in debt
securities. It may invest up to 25% of its assets
in convertible debt securities of domestic and
foreign issuers and up to 10% of its assets in
non-convertible debt securities of domestic and
foreign issuers, including debt obligations of the
U.S. government, foreign governments or their
agencies or instrumentalities. The Fund may engage
in hedging strategies to attempt to reduce the
overall risk of its investment portfolio,
including
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
foreign currency transactions in an attempt to
manage the Fund's foreign currency exposure. No
assurance can be given that the Fund will achieve
its objective.
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 August 31,
1995, 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 40 registered investment
companies with 81 separate portfolios having
aggregate assets of approximately $28.8 billion.
Of that amount, approximately $2.1 billion
represented assets of registered investment
companies investing primarily in U.S. and foreign
equity securities. See 'Management of the Fund.'
Sub-Adviser............... GE Investment Management Incorporated ('GEIM')
serves as the Fund's sub-adviser under a
Sub-Advisory Contract with Mitchell Hutchins. See
'Management of the Fund.'
Dividends and Other
Distributions........... The Fund distributes as dividends all of its net
investment income and net short-term capital gain,
if any, at least annually. The Fund distributes
substantially all of its net capital gain (the
excess of net long-term capital gain over net
short-term capital loss) with the regular annual
dividend. The Fund also distributes any net
realized gains from foreign currency transactions
with such dividend. 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
Amex or otherwise at prices that may be higher or
lower than the net asset value per share 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 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.'
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Special Considerations and
Risk Factors............ Investments in Small Cap Companies. Small cap
companies may be more vulnerable than larger
companies to adverse business or economic
developments. Small cap companies may also have
limited product lines, markets or financial
resources. Securities of such companies may be
less liquid and more volatile than securities of
larger companies or the market averages in general
and therefore may involve greater risk than
investing in larger companies. In addition, small
cap companies may not be well-known to the
investing public, may not have institutional
ownership and may have only cyclical, static or
moderate growth prospects.
Investments in Foreign Securities. Investments in
foreign securities involve risks relating to
political, social and economic developments abroad
and to the differences between the regulations to
which U.S. and foreign issuers and markets are
subject. Individual foreign economies also may
differ favorably or unfavorably from the U.S.
economy. Interest and dividend income on foreign
securities may be subject to non-U.S. withholding
and other taxes that, if not recoverable by the
Fund, may reduce the Fund's return. In addition,
substantial limitations may exist in certain
countries with respect to the Fund's ability to
repatriate investment, capital or the proceeds of
sales of securities. Further, 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.
Foreign securities may be traded on non-U.S.
securities exchanges or markets. Securities of
many foreign issuers are less liquid and their
prices more volatile than securities of comparable
U.S. issuers. These risks are often heightened for
investments in emerging markets. The smaller
capitalization and lower trading volume of certain
of those securities markets may result in greater
market volatility and illiquidity of such foreign
securities as compared to securities of U.S. small
cap companies that are traded on U.S. markets.
Accounting, auditing and financial reporting
standards in many countries may, in some
instances, be less rigorous than such standards in
the United States, and less information may be
available to investors investing in countries
other than the United States than is available to
investors investing in the United States. There is
also generally less governmental regulation of the
securities markets in most other countries than in
the United States. The operating expense ratio of
the Fund can be expected to be higher than that of
an investment company investing exclusively in
U.S. securities because certain expenses of
investing in foreign securities, such as
transaction, settlement and custodial costs, are
higher.
Illiquid Securities. The Fund may invest up to 20%
of its net assets in illiquid securities. The Fund
may not be readily able to dispose of such
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
securities at an amount that approximates that at
which the Fund has valued them. Illiquid
securities include, among other things, restricted
securities (other than Rule 144A securities GEIM
has determined are liquid pursuant to guidelines
established by the Fund's board of directors) and
repurchase agreements maturing in more than seven
days.
Hedging Strategies. The Fund's use of hedging
strategies involves certain special risks,
including (1) the fact that skills needed to use
hedging instruments are different from those
needed to select the Fund's securities, (2)
possible imperfect correlation, or even no
correlation, between price movements of hedging
instruments and price movements of the investments
being hedged, (3) the fact that, while hedging
strategies can reduce the risk of loss, they can
also reduce the opportunity for gain, or even
result in losses, by offsetting favorable price
movements in hedged investments and (4) 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 it 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. Hedging
strategies are also subject to the risk that, if
GEIM incorrectly forecasts interest or currency
exchange rates, market values or other economic
factors in utilizing a strategy for the Fund, it
would have been in a better position had it not
hedged at all. Because the Fund intends to use
options and futures for risk management purposes,
the Fund may enter into options and futures that
approximate (but do not exceed) the full value of
its portfolio, at which point up to 100% of the
Fund's portfolio assets would be subject to
hedging strategies and the risks associated
therewith.
Anti-Takeover Provisions. The Fund's Articles of
Incorporation contain provisions limiting (1) the
ability of other entities or persons to acquire
control of the Fund, (2) the Fund's freedom to
engage in certain transactions and (3) the ability
of the Fund's directors or 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 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 objective and policies.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
See 'Investment Objective and Policies,' 'Other
Investment Practices,' 'Special Considerations and
Risk Factors,' 'Taxation' and 'Description of
Capital Stock.'
Market Price and Net Asset
Value of Shares......... Shares of closed-end investment companies frequently
trade at a discount to their net asset values, and
the Fund's Common Stock has historically traded at
a discount to its net asset value. 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 entirely
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.'
Common 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, the Fund's board of directors, in
consultation with Mitchell Hutchins, intends to
review at least annually the possibility of open
market repurchases of Common Stock and tender
offers for Common Stock at net asset value. 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. The board of
directors also may consider from time to time the
conversion of the Fund to an open-end investment
company. See 'Description of Capital Stock.'
</TABLE>
7
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for a share of
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 July 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 Ernst & Young LLP,
independent auditors, whose report thereon also is included in the Annual Report
to Shareholders.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL YEAR OCTOBER 15, 1993+
ENDED JULY 31, 1995 TO JULY 31, 1994
------------------- -----------------
<S> <C> <C>
Net asset value, beginning of
period............................. $ 13.28 $ 14.18
---------- -----------------
Income from investment operations:
Net investment income (loss)....... 0.08 (0.05)
Net realized and unrealized losses
from investments and
foreign currency transactions... (0.95) (0.80)
---------- -----------------
Total loss from investment
operations......................... (0.87) (0.85)
---------- -----------------
Distributions from net realized
gains and investment
transactions.................... (0.80) --
---------- -----------------
Offering costs charged to capital.... -- (0.05)
---------- -----------------
Net asset value, end of period....... $ 11.61 $ 13.28
---------- -----------------
---------- -----------------
Market value, end of period.......... $ 9.25 $ 12.13
---------- -----------------
---------- -----------------
Total investment return(1)........... (17.64)% (14.46)%
---------- -----------------
---------- -----------------
Ratios/Supplemental Data:
Net assets, end of period
(000's)......................... $44,137 $50,474
Ratio of expenses to average net
assets.......................... 1.69% 1.79%*
Ratio of net investment income
(loss) to average net assets.... 0.62% (0.46)%*
Portfolio turnover rate............ 187% 71%
</TABLE>
- ------------------
* Annualized.
+ Commencement of operations.
(1) Total investment return is calculated assuming a purchase of one share
at market value on the first day of each period reported, reinvestment of
all dividends and capital gain distributions, if any, in accordance with the
Dividend Reinvestment Plan, and a sale at market value on the last day of
the period reported. Total investment return for periods of less than one
year have not been annualized. Total return does not reflect brokerage
commissions.
8
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company and has
registered as such under the Investment Company Act of 1940 ('1940 Act'). The
Fund was incorporated under the laws of the State of Maryland on June 22, 1993
and commenced investment operations on October 15, 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 Amex 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 Amex under the symbol 'GSG.'
The following table sets forth for the Common Stock for each quarterly period
since the commencement of the Fund's operations: (a) the per share high and low
sales prices as reported by the Amex; (b) the per share net asset values, based
on the Fund's computation as of 4:00 p.m. on the last Amex 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. The Fund's Common Stock has
historically traded at a discount to its net asset value. On September 13, 1995,
the closing price per share of Common Stock was $9.00, the Fund's net asset
value per share was $11.29 and the discount to net asset value was (20.3)%.
<TABLE>
<CAPTION>
(DISCOUNT) OR
PREMIUM TO
NET ASSET NET ASSET
SALES PRICES VALUES VALUE
-------------- -------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
10/31/93*.... $15.87 $15.00 $14.20 $14.18 11.80% 5.78%
1/31/94...... 17.12 14.63 16.83 14.65 1.75 (0.17)
4/30/94...... 16.62 12.13 16.56 13.85 0.39 (12.45)
7/31/94...... 13.00 11.63 14.02 13.28 (7.28) (12.46)
10/31/94..... 12.87 11.63 14.67 13.98 (12.24) (16.85)
1/31/95...... 12.00 9.25 14.04 11.52 (14.53) (19.70)
4/30/95...... 9.75 8.13 11.68 10.54 (15.07) (23.13)
7/31/95...... 9.75 8.50 11.65 11.08 (15.66) (21.95)
10/31/95.....
</TABLE>
- ------------------
* For the period October 15, 1993 (commencement of operations) to October 31,
1993.
9
<PAGE>
See 'Description of Capital Stock--Common Stock Repurchases and Tender
Offers' as to methods that may be undertaken by the Fund to reduce any discount.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital appreciation. The Fund
normally invests primarily in equity securities of small capitalization ('small
cap') companies located throughout the world including, but not limited to,
Asia, Europe, the Far East, the Middle East, North Africa and the Americas. For
purposes of the foregoing, 'small cap' companies are companies that, at the time
of investment, have market capitalizations of $1 billion or less.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of small cap companies located throughout the world.
While the Fund is not restricted in the portion of its assets which may be
invested in a single country or region, it is anticipated that, in normal market
conditions, the Fund's assets will be invested in issuers in at least three
countries. In managing the Fund's portfolio, GEIM seeks to identify those small
cap companies, both in the United States and abroad, likely to benefit from
long-term trends as they develop in the global economy. The Fund's investment
policies are designed to enable it to capitalize on unique investment
opportunities presented throughout the world and in international financial
markets influenced by the increasing interdependency of economic cycles and
currency exchange rates.
GEIM believes that, over time, investment in a composite of securities of
U.S. and foreign small cap companies is less risky than portfolios comprised
exclusively of securities of one country's small cap companies and provides
investors with potential to earn a higher return than portfolios invested
exclusively in U.S. small cap securities.
The term 'equity securities,' as used in this Prospectus, includes common
stocks, convertible and non-convertible preferred stock (whether or not voting
stock), and limited partnership interests.
The Fund may invest up to 35% of its total assets in other securities,
including equity securities of companies with higher market capitalizations and
in debt securities. It may invest up to 25% of its assets in convertible debt
securities of domestic and foreign issuers and up to 10% of its assets in
non-convertible debt securities of domestic and foreign issuers, including
obligations issued or guaranteed by the U.S. or foreign governments, their
agencies or instrumentalities. The Fund will not invest more than 5% of its net
assets in debt securities rated below investment grade. See 'Special
Considerations and Risk Factors--Investments in Debt Securities.'
OTHER INVESTMENT PRACTICES
Hedging Strategies. The Fund may engage in hedging strategies transactions
to attempt to reduce the overall risk of its investment portfolio, including
foreign currency transactions in an attempt to manage the Fund's foreign
currency exposure and other risks of the Fund's investments that can affect
fluctuations in its net asset value. The Fund's ability to use these strategies
may be limited by market conditions, regulatory limits and tax considerations.
The SAI contains further information on these strategies.
The Fund may enter into forward currency contracts, buy or sell foreign
currency futures contracts, write covered call options and buy put and call
options on securities, foreign currencies and such futures contracts. In
addition, the Fund may buy or sell interest rate futures contracts and stock
index futures contracts, purchase put and call options or write covered call
options on such contracts, and write covered call options and buy put and call
options on stock indexes. The Fund may write covered put options on securities,
foreign currencies and futures contracts. Because the Fund intends to use
options and futures for risk management purposes, the Fund may enter into
options and futures that approximate (but do not exceed) the full value of its
portfolio, at which point up to 100% of the Fund's portfolio assets would be
subject to hedging strategies and the risks associated therewith.
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 portfolio positions. For
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example, when GEIM 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
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 GEIM anticipates there will be a correlation between the two and
may use forward currency contracts to shift the 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. dollar and foreign currencies.
The Fund might not employ any of the strategies described above, and there
can be no assurance that any strategy used will succeed. If GEIM incorrectly
forecasts interest or currency exchange rates, market values or other economic
factors in utilizing a strategy for the Fund, then it would have been in a
better position had it not hedged at all. The use of these strategies involves
certain special risks, including (1) the fact that skills needed to use hedging
instruments are different from those needed to select the Fund's securities, (2)
possible imperfect correlation, or even no correlation, between price movements
of hedging instruments and price movements of the investments being hedged, (3)
the fact that, while hedging strategies can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments and (4) 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 it 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.
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 objective and regulatory and federal tax
considerations.
Convertible Securities. The Fund may invest up to 25% of its assets in
convertible debt securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed 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 paid or accrued on debt or
dividends paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock because they have
fixed income characteristics, and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.
Illiquid Securities. The Fund may invest up to 20% of its net assets 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 GEIM has determined are liquid pursuant to guidelines
established by the Fund's board of directors) and repurchase agreements maturing
in more than seven days. Limited partnership interests determined to be illiquid
under this definition will be included in this limitation. The lack of a liquid
secondary market for illiquid securities may make it more difficult for the Fund
to assign a value to those securities for purposes of valuing the Fund's
portfolio and calculating its net asset value.
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Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ('1933 Act'). Such
securities include those that are subject to restrictions contained in the
securities laws of other countries. However, securities that are freely
marketable in the country where they are principally traded, but would not be
freely marketable in the United States, will not be considered illiquid. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.
While certain restricted securities may be illiquid, not all restricted
securities are illiquid. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act,
including private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
U.S. and Foreign Government Securities. The Fund may invest up to 10% of
its assets in non-convertible debt securities, including but not limited to U.S.
government and foreign government securities. The U.S. government securities in
which the Fund may invest include direct obligations of the U.S. government
(such as Treasury bills, notes and bonds) and obligations issued or guaranteed
by U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the U.S. government and securities
that are supported primarily or solely by the creditworthiness of the issuer.
The foreign government securities in which the Fund may invest generally
consist of obligations issued by national, state or provincial governments or
their political subdivisions or agencies ('Sovereign Debt'). Foreign government
securities also include debt obligations of supranational entities, which
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development, international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
'quasi-governmental agencies' and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). An example of a
multinational currency unit is the European Currency Unit. A European Currency
Unit represents specified amounts of the currencies of certain member states of
the European Community. Debt securities of quasi-governmental agencies are
issued by entities owned by either a national, state or equivalent government or
are obligations of a political unit that is not backed by the national
government's full faith and credit and general taxing powers. Foreign government
securities also include mortgage-related securities issued or guaranteed by
national, state or provincial governmental instrumentalities, including
quasi-governmental agencies.
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
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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 GEIM to present minimum credit risks in accordance with
guidelines established by the Fund's board of directors.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with banks and broker-dealers up to an aggregate value of 10% of its
total assets. Such agreements involve the sale of securities held by the Fund
subject to its agreement to repurchase the securities at an agreed-upon date and
price reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, the Fund will maintain with
its custodian, in a segregated account, cash, U.S. government securities or
other liquid, high-grade debt obligations, marked to market daily, in an amount
at least equal to its obligations under the reverse repurchase agreement.
Lending of Portfolio Securities. The Fund is authorized to lend up to 10%
of the total value of its portfolio securities to broker-dealers or
institutional investors that GEIM deems qualified, but only when the borrower
maintains with the Fund's custodian bank collateral either in cash or money
market instruments, marked to market daily, in an amount at least equal to the
market value of the securities loaned, plus accrued interest and dividends. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, GEIM 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 or money market instruments 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 by GEIM to be in the
Fund's interest.
Defensive Investments. When GEIM 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. The Fund also may
engage in short sales of securities 'against the box' to defer realization of
gains or losses for tax or other purposes. The Fund also may borrow money for
temporary or emergency purposes (e.g., clearance of transactions or payments of
dividends to stockholders) in an amount not exceeding 10% of the value of the
Fund's total assets (not including the amount borrowed). The Fund will not
purchase securities while borrowings (including reverse repurchase agreements)
in excess of 5% of the value of its total assets are outstanding.
Portfolio Turnover. The Fund's portfolio turnover rate may vary greatly
from year to year and will not be a limiting factor when GEIM deems portfolio
changes appropriate. Higher portfolio turnover will result in higher Fund
expenses including, brokerage commissions, dealer mark-ups and other transaction
costs on the sale of securities and on reinvestments in other securities. 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 year ended July 31, 1995 and for the period
October 15, 1993 (commencement of operations) to July 31, 1994, the Fund's
portfolio turnover rate was 187% and 71%, respectively. The increase in the
portfolio turnover rate for the fiscal year ended July 31, 1995 was largely due
to the restructuring of the Fund's portfolio as a result of greater worldwide
market volatility and portfolio restructuring following the change in the Fund's
management.
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Other Information. The Fund's investment objective and the 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.
SPECIAL CONSIDERATIONS AND RISK FACTORS
Investments in Small Cap Companies. Small cap companies may be more
vulnerable than larger companies to adverse business or economic developments.
Small cap companies may also have limited product lines, markets or financial
resources. Securities of such companies may be less liquid and more volatile
than securities of larger companies or the market averages in general and
therefore may involve greater risk than investing in larger companies. In
addition, small cap companies may not be well-known to the investing public, may
not have institutional ownership and may have only cyclical, static or moderate
growth prospects.
Investments in Foreign Securities. Investments in foreign 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
foreign issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, limitations on the use or transfer of Fund assets and
political or social instability or diplomatic developments. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments positions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. These risks are
often heightened for investments in emerging capital markets.
In addition, substantial limitations may exist in certain countries with
respect to the Fund's ability to repatriate investment income, capital or the
proceeds of sales of securities by foreign investors. The Fund could be
adversely affected by delays in, or a refusal to grant, any required government
approval for repatriation of capital, as well as by the application to the Fund
of any restrictions on investments.
The securities markets of many of the emerging countries in which the Fund
may invest are substantially smaller, less developed, less liquid and more
volatile than the securities markets of the United States and other more
developed countries. Disclosure and regulatory standards in many respects are
less stringent than in the United States 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 foreign securities held by the Fund will not be registered with
the SEC, nor will the issuers thereof be 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 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 that, if not recoverable by the Fund, may reduce the Fund's
return.
Additionally, because foreign securities ordinarily will be denominated in
currencies other than the U.S. dollar, 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 stockholders 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
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demand in the currency exchange markets, international balances of payments,
government intervention, speculation and other economic and political
conditions. 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. 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 tax to which the Fund
would be subject.
In addition to purchasing securities of foreign issuers in foreign markets,
the Fund may invest in American Depository Receipts ('ADRs'), European
Depository Receipts ('EDRs') or other securities convertible into securities of
corporations based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, traded in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets, and EDRs, in
bearer form, may be denominated in other currencies and are designed for use in
European securities markets. ADRs are receipts typically issued by a U.S. bank
or trust company evidencing ownership of underlying securities. EDRs are
European receipts evidencing a similar arrangement. For purposes of the Fund's
investment policies, ADRs and EDRs are deemed to have the same classification as
the underlying securities they represent. Thus, an ADR or EDR evidencing
ownership of common stock will be treated as common stock.
Brokerage commissions, custodial services and other costs relating to
investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging capital markets.
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.
Investments in Debt Securities. The Fund may invest up to 25% of its
assets in convertible debt securities of domestic and foreign issuers and up to
10% of its assets in non-convertible debt securities of domestic and foreign
issuers. The value of the debt securities held by the Fund generally will
fluctuate with (i) movements in interest rates, (ii) changes in the relative
values of the currencies in which the Fund's investments are denominated with
respect to the U.S. dollar and (iii) changes to the perceived creditworthiness
of the issuers of those securities. The market value of debt securities
generally varies inversely with interest rate changes. The extent of the
fluctuation will depend on various other factors, such as the average maturity
of the Fund's debt securities, the extent to which the Fund holds debt
securities denominated in foreign currencies and the extent to which the Fund
engages in hedging strategies. Substantially all of the Fund's investments in
debt securities (including foreign government securities and convertible debt
securities) will be rated at least investment grade by Standard & Poor's ('S&P')
(BBB or better) or Moody's Investors Service, Inc. ('Moody's') (Baa or better)
or, if unrated by either, determined by GEIM to be of comparable quality.
Moody's considers securities rated Baa to have speculative characteristics. In
addition, in the opinion of S&P, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for securities
rated BBB to make principal and interest payments than is the case for
higher-rated securities. The Fund may also invest up to 5% of its net assets
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in debt securities rated as low as B+ by S&P or B1 by Moody's. These securities
are deemed by those agencies 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 Fund is also permitted to purchase debt
securities that are not rated by S&P or Moody's but that GEIM determines to be
of comparable quality to that of rated securities in which the Fund may invest.
Such securities are included in the computation of any percentage limitations
applicable to the comparable rated securities. In the event that, due to a
downgrade of one or more debt securities, an amount in excess of 5% of the
Fund's net assets is held in securities rated below investment grade and
comparable unrated securities, GEIM will engage in an orderly disposition of
such securities to the extent necessary to ensure that the Fund's holdings of
such securities do not exceed 5% of the Fund's net assets. Ratings of debt
securities represent the rating agencies' opinions regarding their quality, are
not a guarantee of quality and may be reduced after the Fund has acquired the
security. GEIM would consider such an event in determining
whether the Fund should continue to hold the security. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risk of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's financial condition may be better or worse than the rating indicates.
See the SAI for more information about S&P's and Moody's ratings.
Investment by the Fund in Sovereign Debt involves special risks. The issuer
of the debt or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal and/or interest when due in
accordance with the terms of such debt, and the Fund may have limited legal
recourse in the event of a 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
diminished. 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 debt issued by the
same sovereign entity may not contest payments to the holders of Sovereign Debt
in the event of default under commercial bank loan agreements.
Anti-Takeover Provisions. The Fund's Articles of Incorporation contain
provisions limiting (1) the ability of other entities or persons to acquire
control of the Fund, (2) the Fund's freedom to engage in certain transactions
and (3) the ability of the Fund's directors or 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
frequently trade at a discount to their net asset values, and the Fund's Common
Stock has historically traded at a discount to its net asset value. 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 entirely 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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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, to Mitchell
Hutchins and to GEIM subject to the Fund's investment objective 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 are provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
October 6, 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 August 31, 1995, total
assets under Mitchell Hutchins' management were approximately $44.7 billion. As
of that date, Mitchell Hutchins served as investment adviser or sub-adviser to
40 registered investment companies with 81 separate portfolios having aggregate
assets of approximately $28.8 billion. Of that amount, approximately $2.1
billion represented assets of registered investment companies investing
primarily in U.S. and foreign equity securities.
GEIM serves as sub-adviser pursuant to a Sub-Advisory Agreement with
Mitchell Hutchins dated July 10, 1995. GEIM's principal business address is 3003
Summer Street, P.O. Box 7900, Stamford, Connecticut 06904 and is a wholly owned
subsidiary of General Electric Company. GEIM is a registered investment adviser,
and its principal officers and directors serve in similar capacities with
respect to General Electric Investment Corporation ('GEIC'), also a registered
investment adviser and a wholly owned subsidiary of General Electric Company.
GEIM and GEIC together provide investment management services to various
institutional accounts with total assets of approximately $50.7 billion as of
July 31, 1995.
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 has delegated
these responsibilities to GEIM subject to the supervision of Mitchell Hutchins.
Mitchell Hutchins 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
1.00% of the Fund's average weekly net assets. This fee is greater than the
advisory and administration fees paid by most funds. Mitchell Hutchins (not the
Fund) pays GEIM a fee at an annual rate of 0.50% of average weekly net assets.
The Fund incurs various other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and stockholder meetings, fees and expenses relating to registration of
the Common Stock, taxes and governmental fees, fees and expenses of the
directors, costs of obtaining insurance, expenses of printing and distributing
stockholder materials and organizational expenses, including costs or losses to
any litigation. For the fiscal year ended July 31, 1995 and for the fiscal
period ended July 31, 1994, the Fund's total expenses, stated as a percentage of
net assets, were 1.69% and 1.79%, respectively.
Ralph R. Layman has been primarily responsible for the day-to-day
management of the Fund's portfolio since March 1995. Mr. Layman is an Executive
Vice President and a senior investment manager of GEIM and GEIC. From 1989 to
1991, Mr. Layman served as Executive Vice President, partner and portfolio
manager of Northern Capital Management Co. and prior thereto, served as Vice
President and portfolio manager of Templeton Investment Counsel.
Mitchell Hutchins and GEIM 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.
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DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
Dividends and Other Distributions. The Fund distributes as dividends all
of its net investment income and net short-term capital gain, if any, at least
annually. The Fund distributes substantially all of its net capital gain with
the regular annual dividend. The Fund also distributes any net realized gains
from foreign currency transactions with such dividend. The Fund may make
additional distributions if necessary to avoid a 4% excise tax on certain
undistributed income and capital gain.
The Fund may change its distribution policy in the event its experience
indicates, or the board of directors for any other reason determines, that
changes are desirable.
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 hold their shares in the name of a broker or nominee other than
PaineWebber (or its nominee) should contact such 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 the Common
Stock are transferred into the name of another broker or nominee.
The Transfer Agent will serve as agent for the stockholders in
administering the Plan. After the Fund declares a dividend or determines to make
a capital gain distribution, the Transfer Agent will, as agent for the
participants, receive the cash payment and use it to buy shares of Common Stock
in the open market, on the Amex or otherwise, for the participants' accounts.
Such shares may be purchased at prices that may be 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 will be equal to the result obtained by
dividing the amount of the distribution payable to a particular 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
will maintain all stockholder accounts in the Plan and furnish 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 will be held by the Transfer Agent in non-certificated form in the
name of the participant, and each stockholder's proxy will include 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 will be paid by the Fund. However, each participant will pay 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 will not relieve participants of any income tax that may be
payable on such distributions. See 'Taxation.'
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.
18
<PAGE>
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.
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
received 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 received 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
commissions incurred by the Transfer Agent.
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 could 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 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 paid to such stockholders who otherwise
are subject to backup withholding.
19
<PAGE>
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 currently 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 Amex applicable to listed companies, the Fund will
be required to hold an annual meeting of stockholders in each year. If the rules
of the Amex 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 Amex (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 'Common 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.
The following chart indicates the shares of the Common Stock outstanding as
of November , 1995:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
REGISTRANT OR FOR ITS HELD BY REGISTRANT
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT OR FOR ITS ACCOUNT
- ---------------- ----------------- --------------------- -------------------
<S> <C> <C> <C>
Common Stock.... 100,000,000 0 3,801,667
</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 times may consider such
20
<PAGE>
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.
There is no assurance that repurchases or tender offers will result in the
Common Stock trading at a price that is equal or close to its net asset value
per share. Nevertheless, the fact that the Common Stock may be the subject of
tender offers at net asset value from time to time may reduce the spread that
might otherwise exist between the market price of the Common Stock and net asset
value per share. In the opinion of Mitchell Hutchins, sellers may be less
inclined to accept a significant discount if they have a reasonable expectation
of being able to recover net asset value in conjunction with a possible tender
offer.
Although the board 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 objective, 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.
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 determines 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 will 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
21
<PAGE>
option of the holder thereof for redemption at a price based on the then current
net asset value per share. In such event, the Fund could be required to
liquidate portfolio securities to meet requests for redemption, the Common Stock
would no longer be listed on the Amex 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 objective 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. 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: (1) the ability of other entities or persons to acquire
control of the Fund; (2) the Fund's freedom to engage in certain transactions;
or (3) 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:
(1) merger, consolidation or statutory share exchange of the Fund with
or into any other corporation;
(2) issuance of any securities of the Fund to any person or entity for
cash;
(3) 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
(4) 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.
22
<PAGE>
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--Common 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 objective 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.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian of the Fund's assets. State Street Bank
and Trust Company 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>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions................... 1
Hedging Strategies..................................... 6
Directors and Officers................................. 13
Control Persons and Principal Holders of Securities.... 17
Investment Advisory Arrangements....................... 17
Portfolio Transactions................................. 18
Valuation of Common Stock.............................. 20
Taxation............................................... 21
Additional Information................................. 23
Financial Statements................................... 24
Appendix A............................................. 25
Appendix B............................................. 29
</TABLE>
23
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO 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
----
<S> <C>
Fund Expenses...................................................... 2
Prospectus Summary................................................. 3
Financial Highlights............................................... 8
The Fund........................................................... 9
The Offering....................................................... 9
Use of Proceeds.................................................... 9
Trading History.................................................... 9
Investment Objective and Policies.................................. 10
Other Investment Practices......................................... 10
Special Considerations and Risk Factors............................ 14
Management of the Fund............................................. 17
Dividends and Other Distributions; Dividend Reinvestment Plan...... 18
Taxation........................................................... 19
Description of Capital Stock....................................... 20
Custodian, Transfer and Dividend Disbursing Agent and Registrar.... 23
Further Information................................................ 23
</TABLE>
GLOBAL SMALL CAP
FUND INC.
COMMON STOCK
------------------------
P R O S P E C T U S
------------------------
PAINEWEBBER INCORPORATED
------------------------
, 1995
================================================================================
(COPYRIGHT)1995 PaineWebber Incorporated
[LOGO] Recycled
Paper
<PAGE>
GLOBAL SMALL CAP FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Global Small Cap Fund Inc. (the 'Fund') is a diversified, closed-end
management investment company. The Fund's investment objective is long-term
capital appreciation. No assurance can be given that the Fund will be able to
achieve its investment objective.
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 the Fund's investment adviser and
administrator. GE Investment Management Incorporated ('GEIM') serves as the
Fund's sub-adviser. This Statement of Additional Information ('SAI') is not a
prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated November , 1995. Capitalized terms not otherwise defined
herein have the same meanings 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 November , 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
SPECIAL RISK CONSIDERATIONS
Investments in Foreign Securities. The Fund's brokerage transactions
involving securities of companies headquartered in countries other than the
United States are conducted primarily on the principal exchanges of such
countries. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment, may expose a Fund to increased risk in the event of a failed trade or
the insolvency of a foreign broker-dealer. Transactions on foreign exchanges are
usually subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions, although the Fund will endeavor to achieve the
best net results in effecting its portfolio transactions. There is generally
less government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could reduce
the return on 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.
<PAGE>
Foreign Currency Transactions. Although the Fund values its assets daily
in U.S. dollars, it does not intend to convert its holdings of foreign
currencies to U.S. dollars on a daily basis. The Fund's foreign currencies may
be held as 'foreign currency call accounts' at foreign branches of foreign or
domestic banks. These accounts bear interest at negotiated rates and are payable
upon relatively short demand periods. If a bank became insolvent, the Fund could
suffer a loss of some or all of the amounts deposited. The Fund may convert
foreign currency to U.S. dollars from time to time. Although foreign exchange
dealers generally do not charge a stated commission or fee for conversion, the
prices posted generally include a 'spread,' which is the difference between the
prices at which the dealers are buying and selling foreign currencies.
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') 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. ('NASD'). An insufficient number of qualified buyers interested in
purchasing Rule 144A-eligible restricted securities held by the Fund, however,
could affect adversely the marketability of such portfolio securities and the
Fund might be unable to dispose of such securities promptly or at favorable
prices.
The Fund may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by the Fund.
The assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
The board of directors has delegated the function of making day-to-day
determinations of liquidity to GEIM pursuant to guidelines approved by the
board. GEIM 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). GEIM will
monitor the liquidity of restricted securities in the Fund's portfolio and
report periodically on such decisions to the board of directors.
Sovereign Debt. Investment by the Fund in debt securities issued by
foreign governments and their political subdivisions or agencies ('Sovereign
Debt') involves special risks. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal and/or interest when due in accordance with the terms of such
debt, and the Fund may have limited legal recourse in the event of a 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 diminished. 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 debt issued by the
2
<PAGE>
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 interest
due 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. 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.
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. While GEIM manages the Fund's portfolio in a manner that
is intended to 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.
Yield Factors and Ratings. Moody's Investors Service, Inc. ('Moody's') and
Standard & Poor's ('S&P') are private services that provide ratings of the
credit quality of debt obligations. A description of the ratings assigned to
corporate debt obligations by Moody's and S&P is included in Appendix A to this
SAI. The Fund may use these ratings in determining whether to purchase, sell or
hold a security. It should be emphasized, however, that ratings are general and
are not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and ratings may have different market prices.
As noted in the Prospectus, rating agencies may fail to make timely changes
in ratings. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuers current financial condition, which may
be better or worse than the rating would indicate. The rating assigned by a
rating agency does not reflect an assessment of the volatility of the security's
market value or of the liquidity of an investment in the security.
OTHER INVESTMENT PRACTICES
Convertible Securities. As described in the Prospectus, the Fund may
invest in convertible securities. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable nonconvertible 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, and 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
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convertible security will be increasingly influenced by its conversion value. In
addition, a convertible security generally will sell at a premium over its
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding a fixed income
security.
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. The Fund maintains custody
of the underlying securities prior to their repurchase; thus, the obligation of
the bank or dealer to pay the repurchase price on the date agreed to is, in
effect, secured by such securities. If the value of these securities is less
than the repurchase price, plus any agreed-upon additional amount, the other
party to the agreement must provide additional collateral so that at all times
the collateral is at least equal to the repurchase price plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price which was paid by the Fund upon
acquisition is 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
a repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
GEIM to present minimum credit risks in accordance with guidelines established
by the Fund's board of directors. GEIM will review and monitor the
creditworthiness of those institutions under the board's general supervision.
Lower Rated Debt Securities. The Fund may invest up to 5% of its net
assets in debt securities rated as low as B+ by S&P or B1 by Moody's. Lower
rated debt securities generally offer a higher current yield than that available
for higher grade issues. However, lower rated 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 fluctuations 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 interest and principal
and increase the possibility of default. The market for lower rated debt
securities generally is thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
Short Sales 'Against the Box.' The Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales 'against the
box') to defer realization of gains or losses for tax or other purposes. To make
delivery to the purchaser in a short sale, the executing broker borrows the
securities being sold short on behalf of the Fund, and the Fund is obligated to
replace the securities borrowed at a date in the future. When the Fund sells
short, it will establish a margin account with the broker effecting the short
sale, and will deposit collateral with the broker. In addition, the Fund will
segregate with its custodian the securities that could be used to cover the
short sale. The Fund will incur transaction costs, including interest expense,
in connection with opening, maintaining and closing short sales against the box.
The Fund currently does not intend to have obligations under short sales that at
any time during the coming year exceed 5% of the Fund's net assets.
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The Fund might make a short sale 'against the box' in order to hedge
against market risks when GEIM believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the Fund
or a security convertible into or exchangeable for a security owned by the Fund,
or when GEIM wants to sell a security that the Fund owns at a current price, but
also wishes to defer recognition of gain or loss for federal income tax
purposes. In such case, any loss in the Fund's long position after the short
sale should be reduced by a gain in the short position. Conversely, any gain in
the long position should be reduced by a loss in the short position. The extent
to which gains or losses in the long position are reduced will depend upon the
amount of the securities sold short relative to the amount of the securities the
Fund owns, either directly or indirectly, and in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
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. The Fund may not:
(1) issue senior securities (including borrowing money from banks and
other entities, and reverse repurchase agreements) in excess of 33 1/3% of
its total assets (including the amount of senior securities issued but
excluding 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 of the Fund's investments in such industry
to equal 25% or more of the Fund's total assets, provided that this
limitation shall not apply with respect to investments 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 and forward contracts;
(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 make short sales 'against the box' and maintain
short positions in connection with its use of options, futures contracts,
options on futures contracts and forward contracts;
(6) purchase or sell real estate (including real estate limited
partnership interests), provided that the Fund may invest in securities
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein, and provided further that the
Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and liquidate real estate
acquired as a result of such enforcement;
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(7) purchase or sell commodities or commodity contracts, except that
the Fund 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;
(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; or
(10) purchase the securities of any issuer if as a result more than 5%
of the total assets of the Fund would be invested in the securities of that
issuer; provided that securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities are not subject to this
limitation and further provided that up to 25% of the value of the Fund's
assets may be invested without regard to this limitation.
HEDGING STRATEGIES
As discussed in the Prospectus, GEIM may use a variety of financial
instruments ('Hedging Instruments'), including certain options, futures
contracts (sometimes referred to as 'futures'), options on futures contracts and
forward currency contracts, to attempt to hedge the Fund's portfolio. The
particular Hedging Instruments used by the Fund are described in Appendix B to
this SAI.
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 cost 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.
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 stock indexes, in contrast, generally
are used to hedge against price movements in broad equity market sectors in
which a Fund has
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invested or expects to invest. 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 Commodity Futures Trading Commission ('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, GEIM expects to discover additional opportunities in connection
with options, futures contracts, forward currency contracts and other hedging
techniques. These new opportunities may become available as GEIM 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. GEIM may utilize these opportunities to the
extent that they are consistent with the Fund's investment objective and
permitted by the Fund's investment limitations and applicable regulatory
authorities. The Fund's Prospectus or SAI will be supplemented to the extent
that new products or techniques involve materially different risks than those
described below or in the Prospectus.
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 GEIM's
ability to predict movements of the overall securities, currency, and
interest rate markets, which requires different skills than predicting
changes in the prices of individual securities. While GEIM 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 indexes 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 GEIM 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
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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 or
futures contracts or (2) cash, receivables 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 call options, on equity and debt securities, stock indexes 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 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. If the covered call option is an OTC option, the securities or other
assets used as cover would be considered illiquid to the extent described under
'Investment Policies and Restrictions--Illiquid Securities.'
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. The Fund currently intends to write put options only to effect
closing sale transactions. 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
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OTC option, it relies on the contra party to make or take delivery of the
underlying investment upon exercise of the option. Failure by the contra party
to do so would result in the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
Generally, the OTC debt and foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Fund's ability to establish the close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the contra
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.
Futures. The Fund may purchase and sell stock index futures contracts,
interest rate futures contracts and foreign currency futures contracts. The Fund
may also purchase put and call options, and write covered 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
indexes. Similarly, writing covered put options on futures contracts can serve
as a limited long hedge.
In certain circumstances, it may be less expensive for the Fund to create a
synthetic futures contract than to buy a futures contract. A synthetic futures
contract is created when the Fund buys a call option on a futures contract and
writes a put option on the same futures contract with the same strike price and
expiration date. Because the Fund will receive a premium for writing the put
option (which will offset in whole or in part the premium it pays for buying the
call option), it may, under certain market conditions, be less expensive for the
Fund to create a synthetic futures contract than to pay the transaction costs
required to buy the underlying futures contract. 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 a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin or
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
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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.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures 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 a call 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 related 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 related 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 related 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 that 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
these 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 stockholder vote. Adoption of this guideline
cannot be guaranteed to limit the percentage of the Fund's assets at risk to 5%.
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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 another currency or a
basket of currencies, the values of which GEIM believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Hedging Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the 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.
Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and any
combination of futures and options transactions ('component' transactions),
instead of a single Hedging Instrument, as part of a single or combined strategy
when, in the opinion of GEIM, it is in the best interests of the Fund to do so.
A combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on GEIM's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
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
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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 GEIM 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 owns
securities denominated in a foreign currency and GEIM believes that currency
will 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 the
Hedging Instrument 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 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.
12
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund, their business addresses
and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME, ADDRESS* AND AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.; 69**.... Director and Mr. Bewkes is a director of
Chairman of Paine Webber Group Inc. ('PW
the Board of Group') (holding company of
Directors Mitchell Hutchins and
PaineWebber) and a
consultant to PW Group.
Prior to 1988, he was
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 BioTherapeutics, Inc.
and a director or trustee of
26 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Richard R. Burt; 47 ............ Director Mr. Burt is chairman of
International Equity
Partners (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 four other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
John R. Torell III; 56 ......... Director Mr. Torell is chairman of
767 Fifth Avenue Torell Management, Inc.
Suite 4605 (financial advisory firm)
New York, NY 10153 (since 1989). He is the
former chairman and chief
executive officer of Fortune
Bancorp (1990-1991 and
1990-1994, respectively). He
is 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., Volt
Information Sciences Inc.
and a director or trustee of
seven other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME, ADDRESS* AND AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
William D. White; 61 ........... Director Mr. White is retired. From
P.O. Box 199 February 1989 through March
Upper Black Eddy, PA 18972 1994, he was 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 also a director or
trustee of eight other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Margo N. Alexander; 48.......... President Mrs. Alexander is president,
chief executive officer and
a director of Mitchell
Hutchins. Prior to January
1995, Mrs. Alexander was an
executive vice president of
PaineWebber. Mrs. Alexander
is also a trustee of two
other investment companies
and president of 38 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Teresa M. Boyle; 36............. Vice President Ms. Boyle is a first vice
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 38 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Joan L. Cohen; 31............... Vice President Ms. Cohen is a vice president
and and attorney of Mitchell
Assistant Hutchins. Prior to December
Secretary 1993, she was an associate
at the law firm of Seward &
Kissel. Ms. Cohen is also a
vice president and assistant
secretary of 26 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
C. William Maher; 34............ Vice President Mr. Maher is a first vice
and president and the senior
Assistant manager of the Fund
Tresurer Administration Division of
Mitchell Hutchins. Mr. Maher
is also a vice president and
assistant treasurer of 38
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME, ADDRESS* AND AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Ann E. Moran; 38................ Vice President Ms. Moran is a vice president
and of Mitchell Hutchins. Ms.
Assistant Moran is also a vice
Treasurer president and assistant
treasurer of 38 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 43......... Vice President Ms. O'Donnell is a senior vice
and president and deputy general
Secretary counsel of Mitchell
Hutchins. Ms. O'Donnell is
also a vice president and
secretary of 38 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 44....... Vice President Ms. Schonfeld is a managing
director and general counsel
of Mitchell Hutchins. From
April 1990 to May 1994, she
was a partner in the law
firm of Arnold & Porter.
Prior to April 1990, she was
a partner in the law firm of
Shereff, Friedman, Hoffman &
Goodman. Ms. Schonfeld is
also a vice president of 38
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Paul H. Schubert; 32............ Vice President Mr. Schubert is a first vice
and president of Mitchell
Assistant Hutchins. From August 1992
Treasurer 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 38
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 35.......... Vice President Mr. Sluyters is a senior vice
and president and the director
Treasurer of the mutual fund finance
division of 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
38 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME, ADDRESS* AND AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Gregory K. Todd; 38............. Vice President Mr. Todd is a first vice
and president and associate
Assistant general counsel of Mitchell
Secretary Hutchins. Prior to 1993, he
was a partner in the law
firm of Shereff, Friedman,
Hoffman & Goodman. Mr. Todd
is also a vice president and
assistant secretary of 38
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 by the 1940 Act,
by reason of his position with PW Group.
The Fund will pay 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. The
table below includes certain information relating to the compensation of the
Fund's directors.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM THE FUND
COMPENSATION PART OF ANNUAL AND THE FUND
NAME OF FROM THE FUND'S BENEFITS UPON COMPLEX PAID
PERSON, POSITION THE FUND* EXPENSES RETIREMENT TO DIRECTORS+
- ------------------------------ ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.,
Director and chairman of
the board of directors...... -- -- -- --
Richard R. Burt,
Director.................... -- -- -- --
John R. Torell III,
Director.................... $3,500 -- -- $39,750
William D. White,
Director.................... $2,500 -- -- $33,250
</TABLE>
- ------------------
* Represents fees paid to each director during the fiscal year ended July 31,
1995.
+ Represents total compensation paid to each director by the Fund Complex for
the calendar year ended December 31, 1994.
16
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of November , 1995, Cede & Co. (the nominee for The Depository Trust
Company, a securities depository) owned of record [ ] of the Fund's
shares of Common Stock or [ ]% 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 August 31, 1995, the directors and officers of the Fund as a group
beneficially owned less than 1% of the outstanding Common Stock.
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated October 6, 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. Mitchell Hutchins has
delegated these responsibilities to GEIM subject to the supervision of Mitchell
Hutchins. 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. Pursuant to a separate contract with
Mitchell Hutchins, dated as of July 10, 1995 ('Sub-Advisory Contract'), GEIM
serves as the Fund's sub-adviser. GEIM makes investment decisions and places
orders to buy, sell or hold particular securities for the Fund.
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 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 American Stock Exchange, Inc. ('Amex') 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'),
17
<PAGE>
on June 23, 1993 and by its initial stockholder on September 27, 1993. Unless
sooner terminated, the Advisory Contract will remain in effect for two years
from its execution. Thereafter, if not 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. Under the Sub-Advisory Contract, GEIM
is not liable for any error of judgment or mistake of law or for any loss
suffered by the Fund, its stockholders or Mitchell Hutchins in connection with
the Sub-Advisory Contract, except any liability to the Fund, its stockholders or
Mitchell Hutchins to which GEIM would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on the part of GEIM in the
performance of its duties or from reckless disregard by GEIM of its obligations
and duties under the Sub-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.
The Sub-Advisory Contract was approved by the Fund's board of directors and
by a majority of the directors who are not parties to the Sub-Advisory Contract
or interested persons of any such party, on March 22, 1995 and by the
stockholders of the Fund on July 10, 1995. The Sub-Advisory Contract terminates
automatically upon assignment or upon termination of the Advisory Contract and
is terminable by vote of the Fund's 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 GEIM. The Sub-Advisory Contract may be
terminated by Mitchell Hutchins: (1) upon material breach by the GEIM of its
representations and warranties; (2) if GEIM becomes unable to discharge its
duties and obligations under the Sub-Advisory Contract; or (3) on 120 days'
notice to GEIM. GEIM may terminate the Sub-Advisory Contract at any time on 120
days' notice to Mitchell Hutchins.
For the fiscal year ended July 31, 1995 and for the fiscal period October
15, 1993 (commencement of operations) to July 31, 1994, the Fund paid or accrued
to Mitchell Hutchins $469,312 and $443,907, respectively, in investment advisory
and administration fees. Mitchell Hutchins (not the Fund) paid or accrued to
GEIM $76,013 in investment advisory fees during the fiscal year ended July 31,
1995.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of directors, and oversight by
Mitchell Hutchins, GEIM is responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, GEIM 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. 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 may invest in securities traded in the OTC market and will engage
primarily in transactions with the dealers who make markets in such securities,
unless a better price or execution could be obtained by using a broker. While
GEIM
18
<PAGE>
generally seeks competitive commission rates and dealer spreads, payment of the
lowest commission or spread is not necessarily consistent with obtaining the
best net results.
The Fund has 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 GEIM and its
affiliates, are similar to those in effect with respect to brokerage
transactions in securities. For the fiscal year ended July 31, 1995, and for the
period October 15, 1993 (commencement of operations) to July 31, 1994, the Fund
paid no commissions to FCMs.
Consistent with the Fund's interests and subject to the review of the board
of directors, GEIM 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 GEIM determines in good faith that such commission is reasonable
in terms either of that particular transaction or of the overall responsibility
of GEIM 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, GEIM seeks best execution. Although GEIM may receive certain research
or execution services in connection with these transactions, GEIM 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, GEIM 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. GEIM 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 GEIM receiving multiple quotes from dealers
before executing the transaction on an agency basis.
Research services furnished by dealers or brokers with or through which the
Fund effects securities transactions may be used by GEIM in advising other funds
or accounts and, conversely, research services furnished to Mitchell Hutchins or
GEIM by dealers or brokers in connection with other funds or accounts that
either of them advise may be used by GEIM in advising the Fund. Information and
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by Mitchell Hutchins under the Advisory
Contract and by GEIM under the Sub-Advisory Contract.
Investment decisions for the Fund and for other investment accounts managed
by GEIM are made independently of each other in the light of differing
considerations for the various accounts. The same investment
19
<PAGE>
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 GEIM 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, GEIM and their affiliates not
participate in or benefit from the sale to the Fund.
For the period August 1, 1994 to March 23, 1995, Mitchell Hutchins directed
$117,616 in portfolio transactions to brokers chosen because they provided
research services, for which the Fund paid $331 in commissions. For the period
March 23, 1995 to July 31, 1995, GEIM directed $251,361 in portfolio
transactions to brokers chosen because they provided research services for which
the fund paid $2,419 in commissions. For the period October 15, 1993
(commencement of operations) to July 31, 1994, Mitchell Hutchins did not
direct any brokerage commissions to brokers chosen because they provide
research and analysis. For the fiscal year ended July 31, 1995 and for the
period October 15, 1993 (commencement of operations) to July 31, 1994, the
Fund paid $442,612 and $500,496, respectively, in brokerage commissions.
VALUATION OF COMMON STOCK
The Fund determines the net asset value of the Common Stock weekly as of
the close of regular trading (currently 4:00 p.m., Eastern time) on the Amex on
the last day of the week on which the Amex is open for trading. The net asset
value of the Common Stock also is determined monthly as of the close of regular
trading on the Amex on the last day of the month on which the Amex 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.
Securities that are listed on U.S. and foreign stock exchanges are valued
at the last sale price on the day the securities are being valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by GEIM as the primary market. Securities
traded in the OTC market and listed on the Nasdaq are valued at the last
available sale price on Nasdaq at 4:00 p.m., eastern time; other OTC securities
are valued at the last bid price available prior to valuation. Securities,
including limited partnership interests, and assets for which reliable market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Fund's board of directors. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining until maturity, unless the board of directors
determines that this does not represent fair value.
All investments quoted in foreign currency 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 trading on the
Amex. Occasionally events affecting the value of foreign investments and such
exchange rates occur between the time at which they are
20
<PAGE>
determined and the close of trading on the Amex, which events will not be
reflected in a computation of the Fund's net asset value on that day. If events
materially affecting the value of such investments or currency exchange rates
occur during such time period, the investments will be valued at their fair
value as determined in good faith by or under the direction of the Fund's board
of directors. The foreign currency exchange transactions of the Fund conducted
on a spot (that is, cash) basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. This rate under
normal market conditions differs from the prevailing exchange rate in 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 sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ('Income
Requirement'); (2) 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 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 stockholders for the year in which that December 31 falls.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
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.
21
<PAGE>
Foreign Taxes. Dividends and interest 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
Fund 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.
Passive Foreign Investment Companies. The Fund may invest in the stock of
'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
contracts, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains or losses the Fund realizes
in connection therewith. These rules also may require the Fund to 'mark to
market' (that is, treat as sold for their fair market value) at the end of each
taxable year certain positions in its portfolio, which may cause the Fund to
recognize income without receiving cash with which to make distributions
necessary to satisfy the Distribution Requirement and to avoid
22
<PAGE>
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 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 contracts on foreign currencies, that are not directly
related to the Fund's principal business of investing in securities (or 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 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 Tenders. 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 Amex (the Amex having advised the Fund that it would consider
delisting if the aggregate market value of the outstanding shares is less than
$1,000,000, the number of publicly held shares falls below 200,000 or the number
of round-lot holders falls below 300), or (b) impair the Fund's status as a RIC
(which would eliminate the Fund's 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 objective 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 Amex 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
23
<PAGE>
Fund or its stockholders if Common Stock was repurchased. The board of directors
may modify these conditions in light of experience.
Custodian. State Street Bank and Trust Company, 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 as 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 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.
Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as the Fund's independent auditors.
Legal Matters. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street,
N.W., Washington, D.C. 20036-5891, 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 STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended July 31,
1995 is a separate document supplied with this SAI and the financial statements,
accompanying notes and report of independent auditors appearing therein are
incorporated by reference in this SAI.
24
<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S LONG-TERM DEBT RATINGS
Aaa. Bonds which are rated 'Aaa' are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as 'gilt edged.' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues;
Aa. Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the 'Aaa' group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat greater than the 'Aaa'
securities;
A. Bonds which are rated 'A' possess many favorable investment attributes
and are considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future;
Baa. Bonds which are rated 'Baa' are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well;
Ba. Bonds which are rated 'Ba' are 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.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from 'Aa' through 'B' in its corporate bond rating system.
The modifier 1 indicates that the security 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 issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S CORPORATE DEBT RATINGS
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 higher rated issues only in small degree;
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;
25
<PAGE>
BBB. Debt rated 'BBB' is regarded as having an 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 in higher rated categories;
BB, B. Debt rated 'BB' and 'B' 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. 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.
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
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
'aaa'. An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks;
'aa'. An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future;
'a'. An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classification, earnings and asset protection are nevertheless expected
to be maintained at adequate levels;
'baa'. An issue which is rated 'baa' is considered to be medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time;
'ba'. An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class;
'b'. An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small;
'caa'. An issue which is rated 'caa' is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments;
26
<PAGE>
'ca'. An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments;
'c'. This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security 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 issue ranks in the lower end of its
generic rating category.
DESCRIPTION OF S&P PREFERRED STOCK RATINGS
'AAA'. This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations;
'AA'. A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA';
'A'. An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions;
'BBB'. An issue rated 'BBB' is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category;
'BB', 'B', 'CCC'. Preferred stocks rated 'BB', 'B', and 'CCC' are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, 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.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
PRIME-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of senior short-term debt obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2. Issuers (or supporting institutions) rated Prime-2 (P-2) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
27
<PAGE>
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3. Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B. Issues rated 'B' are regarded as having only a speculative capacity for
timely payment.
28
<PAGE>
APPENDIX B
The Fund may use the following hedging instruments:
Options on Equity and Debt Securities and Foreign Currencies. A call
option is a short-term contract pursuant to which the purchaser of the
option, in return for a premium, has the right to buy the security
underlying the option at a specified price at any time during the term of
the option. The writer of the call option, who receives the premium, has
the obligation, upon exercise of the option during the option term 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. The writer of the put option,
who receives the premium, has the obligation, upon exercise of the option
during the option term, to buy the underlying security or currency at the
exercise price.
Options on Stock Indexes. A stock index assigns relative values to
the stocks included in the index and fluctuates with changes in the market
values of those stocks. A stock index option operates in the same way as a
more traditional stock option, except that exercise of a stock index option
is effected with cash payment and does not involve delivery of securities.
Thus, upon exercise of a stock 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 stock index.
Stock Index Futures Contracts. A stock 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 stock 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 stocks
comprising the index is made. Generally, contracts are closed out prior to
the expiration due of the contract.
Interest Rate and Foreign Currency Futures Contracts. Interest rate
and foreign currency futures contracts are bilateral agreements pursuant to
which one party agrees to make, and the other party agrees to accept,
delivery of a specified type of debt security or currency at a specified
future time and at a specified price. Although such futures contracts by
their terms call for actual delivery or acceptance of debt securities or
currency, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.
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.
29
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions................... 1
Hedging Strategies..................................... 6
Directors and Officers................................. 13
Control Persons and Principal Holders of Securities.... 17
Investment Advisory Arrangements....................... 17
Portfolio Transactions................................. 18
Valuation of Common Stock.............................. 20
Taxation............................................... 21
Additional Information................................. 23
Financial Statements................................... 24
Appendix A............................................. 25
Appendix B............................................. 29
</TABLE>
GLOBAL SMALL CAP FUND INC.
COMMON STOCK
------------------------
STATEMENT OF ADDITIONAL
INFORMATION
------------------------
PAINEWEBBER INCORPORATED
------------------------
NOVEMBER , 1995
================================================================================
(COPYRIGHT)1995 PaineWebber Incorporated
[LOGO] Recycled
Paper
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements:
Included in Part A of the Registration Statement:
a. Financial Highlights
Included through incorporation by reference in Part B of
the Registration Statement and filed with the Annual
Report to Shareholders with the Securities and Exchange
Commission on September 29, 1995 [File No. 33-64808]
[Accession No. 0000908158-000003]:
a. Portfolio of Investments as of July 31, 1995
b. Statement of Assets and Liabilities as of July 31, 1995
c. Statement of Operations for the year ended July 31, 1995
d. Statement of Changes in Net Assets
e. Notes to Financial Statements
f. Quarterly Results of Operations (unaudited)
g. Financial Highlights
h. Report of Ernst & Young LLP, Independent Auditors
2. Exhibits:
a. Articles of Incorporation1/
b. (i) Bylaws (filed herewith)
(ii) Amendment to Bylaws (filed herewith)
1/ Incorporated by reference to exhibit 1 to the Registrant's initial
Registration Statement on Form N-2, filed June 22, 1993 (File No. 33-
64808).
II-1
c. None
d. Inapplicable
e. Dividend Reinvestment Plan2/
f. None
g. (i) Investment Advisory and Administration Contract3/
(ii) Form of Sub-Advisory Agreement (filed herewith)
h. Underwriting Agreement4/
i. None
j. Form of Custodian Agreement (filed herewith)
k. Transfer Agency Agreement5/
l. Opinion and Consent of Counsel6/
2/ Incorporated by reference to exhibit 5 to Pre-Effective Amendment No.
2 to the Registrant's Registration Statement, filed September 30,
1993 (File No. 33-64808).
3/ Incorporated by reference to exhibit g to Post-Effective Agreement
No. 2 to the Registrant's Registration Statement on Form N-2, filed
November 23, 1994 (File No. 33-64808).
4/ The shares offered by the Prospectus will be offered in order to
effect over-the-counter secondary market transactions by PaineWebber
Incorporated ("PaineWebber") in its capacity as a dealer and
secondary market maker and not pursuant to any agreement with the
Fund. Shares were originally issued in a public offering pursuant to
an Underwriting Agreement, incorporated by reference to exhibit h.(a)
to Post-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-2, filed November 23, 1994 (File No. 33-64808),
and a related document, included as exhibit 8(b) to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2, filed
September 30, 1993 (file No. 33-64808).
5/ Incorporated by reference to exhibit k to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form N-2, filed
November 23, 1994 (File No. 33-64808).
6/ Incorporated by reference to exhibit 12 to Pre-Effective Agreement
No. 3 to the Registrant's Registration Statement on Form N-2, filed
October 6, 1993 (File No. 33-64808).
II-2
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent7/
q. None
Item 25. Marketing Arrangements
Inapplicable. See note accompanying Item 24.2.h.
Item 26. Other Expenses of Issuance and Distribution
Not applicable to current Post-Effective Amendment; for expenses
incurred in connection with this Registration Statement; see the Fund's
Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2,
SEC File No. 33-64808, filed October 6, 1993.
Item 27. Persons Controlled by or Under Common Control
None.
Item 28. Number of Holders of Securities
Number of Record
Holders as of
Title of Class September 28, 1995
Common Stock, par value 90
$0.001 per share
Item 29. Indemnification
Incorporated by reference to Item 29 of Part C to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2, filed October
6, 1993 (File No. 33-64808).
Item 30. Business and Other Connections of Investment Adviser
See "Management of the Fund" in the Prospectus.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a
Delaware corporation, is a registered investment adviser and is wholly
owned by PaineWebber, which in turn is wholly owned by Paine Webber Group
7/ Incorporated by reference to exhibit 16 to Pre-Effective Amendment
No. 2 to the Registrant's Registration Statement, filed September 30,
1993 (File No. 33-64808).
II-3
Inc. Mitchell Hutchins is primarily engaged in the investment advisory
business. Information as to executive officers and directors of Mitchell
Hutchins is included in its Form ADV filed on August 17, 1995, with the
SEC (Registration number 801-13219) and is incorporated herein by
reference.
Item 31. Location of Accounts and Records
The accounts and records of the Fund are maintained at the office of
the Fund's custodian , State Street Bank and Trust Company, at One
Heritage Drive, North Quincy, Massachusetts 02171, except that the Fund's
corporate records (its articles of incorporation, by-laws and minutes of
the meetings of its board of directors and shareholders) are maintained at
the offices of Mitchell Hutchins at 1285 Avenue of the Americas, New York,
New York 10019.
Item 32. Management Services
None.
Item 33. Undertakings
The Undertakings of the Registrant as set forth in the Fund's
Post-Effective Amendment No. 2 to its Registration Statement on Form N-2,
filed on November 23, 1994 (File No. 33-64808) are hereby revised as
follows:
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events after
the effective date of the registration statement (or
the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
II-4
(2) That for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497 under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(3) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(5) To send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the State of New York, on the 26th day of September, 1995.
GLOBAL SMALL CAP FUND INC.
By: /s/ Gregory K. Todd
------------------------------------
Gregory K. Todd
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ E. Garrett Bewkes, Jr. Director and Chairman September 26, 1995
- ------------------------- of the Board of Directors
E. Garrett Bewkes, Jr.*
/s/ John R. Torell III Director September 26, 1995
- -------------------------
John R. Torell III**
/s/ William D. White Director September 26, 1995
- -------------------------
William D. White**
/s/ Margo N. Alexander President (Chief Executive September 26, 1995
- ----------------------- Officer)
Margo N. Alexander***
/s/ Julian F. Sluyters Vice President and Treasurer September 26, 1995
- ----------------------- (Principal Financial and
Julian F. Sluyters Accounting Officer)
- ----------
* Signature affixed by Robert A. Wittie, pursuant to power of attorney dated
January 3, 1994, and incorporated by reference from Post-Effective Amendment No.
20 to the Registration Statement of PaineWebber Master Series, Inc., SEC No.
33-2524, filed February 28, 1994.
II-6
** Signatures affixed by Robert A. Wittie, pursuant to powers of attorney dated
November 15, 1994, and incorporated by reference from Post-Effective Amendment
No. 2 to the Registration Statement of Global Small Cap Fund Inc., SEC No.
33-64808, filed November 23, 1994.
*** Signature affixed by Robert A. Wittie, pursuant to power of attorney dated
May 8, 1995, and incorporated by reference from Post-Effective Amendment No. 34
to the Registration Statement of PaineWebber America Fund, SEC No. 2-78626,
filed May 10, 1995.
II-7
GLOBAL SMALL CAP FUND INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Document Description Sequential
Page
Exhibit Number
<S> <C> <C>
a. Articles of Incorporation [previously filed as Exhibit 1 to the
Registrant's initial Registration Statement on Form N-2, filed
June 22, 1993 (File No. 33-64808)].
b. (i) Bylaws [filed herewith]
(ii) Amendment to the Bylaws [filed herewith]
c. None
d. Inapplicable
e. Dividend Reinvestment Plan [previously filed as Exhibit 5 to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement, filed September 30, 1993 (File No. 33-64808)].
f. None
g. (i) Investment Advisory and Administration Contract [previously
filed as Exhibit g to Post-Effective Agreement No. 2 to the
Registrant's Registration Statement on Form N-2, filed
November 23, 1994 (File No. 33-64808)].
(ii) Form of Sub-Advisory Agreement [filed herewith].
h. (i) Underwriting Agreement [previously filed as Exhibit h.(a)
to Post-Effective Agreement No. 2 to the Registrant's
Registration Statement on Form N-2, filed November 23, 1994
(File No. 33-64808)].
(ii) Master Selected Dealer Agreement [previously filed as
Exhibit 8(b) to Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement, filed September 30,
1993 (File No. 33-64808)]
i. None
j. Form of Custodian Agreement [filed herewith].
II-8
k. Transfer Agency Agreement [ previously filed as Exhibit k to
Post-Effective Agreement No. 2 to the Registrant's Registration
Statement on Form N-2, filed November 23, 1994 (File No. 33-64808)].
l. Opinion and consent of counsel [previously filed as Exhibit 12 to
Pre-Effective Agreement No. 3 to the Registrant's Registration
Statement on Form N-2, filed October 6, 1993 (File No. 33-64808)].
m. None
n. Consent of Independent Auditors [filed herewith].
o. None
p. Letter of Investment Intent [previously filed as Exhibit 16 to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement, filed September 30, 1993 (File No. 33-64808)].
q. None
</TABLE>
II-9
BYLAWS
OF
PAINEWEBBER PREMIER GLOBAL SMALL CAP FUND INC.
(A MARYLAND CORPORATION)
ARTICLE I
NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL
Section 1. Name. The name of the Corporation is PaineWebber Premier Global
Small Cap Fund Inc.
Section 2. Principal Offices. The principal office of the Corporation in the
State of Maryland shall be located in the City of Baltimore. The Corporation
may, in addition, establish and maintain such other offices and places of
business as the Board of Directors may, from time to time, determine.
Section 3. Seal. The corporate seal of the Corporation shall be circular in
form and shall bear the name of the Corporation, the year of its
incorporation, and the word "Maryland." The form of the seal shall be subject
to alteration by the Board of Directors and the seal may be used by causing
it or a facsimile to be impressed or affixed or printed or otherwise
reproduced. Any officer or director of the Corporation shall have authority
to affix the corporate seal of the Corporation to any document requiring the
same.
ARTICLE II
STOCKHOLDERS
Section 1. Annual Meetings. There shall be no stockholders' meeting for the
election of directors and the transaction of other proper business except as
required by law or as hereinafter provided.
Section 2. Special Meetings. Special meetings of stockholders may be called
at any time by the Chairman of the Board, President, any Vice President, or
by a majority of the Board of Directors, and shall be held at such time and
place as may be stated in the notice of the meeting.
Special meetings of the stockholders may be called by the Secretary upon
the written request of the holders of shares entitled to vote not less than
25 percent of all the votes entitled to be cast at such meeting, provided that
(1) such request shall state the purposes of such meeting and the matters
proposed to be acted on, and (2) the stockholders requesting such meeting
shall have paid to the Corporation the reasonably estimated cost of
preparing and mailing the notice thereof, which the Secretary shall determine
and specify to such stockholders. No special meeting shall be called upon the
request of stockholders to consider any matter which is substantially the
same as a matter voted upon at any special meeting of the stockholders held
during the preceding twelve months, unless requested by the holders of a
majority of all shares entitled to be voted at such meeting.
Section 3. Notice of Meetings. The Secretary shall cause notice of the place,
date and hour, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, to be mailed, potage prepaid, not less than
ten nor more than ninety days before the date of the meeting, to each
stockholder entitled to vote at such meeting at his or her address as it
appears on the records of the Corporation at the time of such mailing. Notice
shall be deemed to be given when deposited in the United States mail
addressed to the stockholders as aforesaid. Notice of any stockholders'
meeting need not be given to any stockholder who shall sign a written waiver
of such notice whether before or after the time of such meeting, or to any
stockholder who is present at such meeting in person or by proxy. Notice of
adjournment of a stockholders' meeting to another time or place need not be
given if such time and place are announced at the meeting. Irregularities in
the notice of any meeting to, or the non receipt of any such notice by, any
of the stockholders shall not invalidate any action otherwise properly taken
by or at any such meeting.
Section 4. Quorum and Adjournment of Meetings. The presence at any
stockholders' meeting, in person or by proxy, of stockholders entitled to
cast a majority of the votes shall be necessary and sufficient to constitute
a quorum for the transaction of business. In the absence of a quorum, the
holders of a majority of shares entitled to vote at the meeting and present
in person or by proxy, or, if no stockholder entitled to vote is present in
person or by proxy, any officer present entitled to preside or act as
secretary of such meeting may adjourn the meeting without determining the
date of the new meeting or from time to time without further notice to a date
not more than 120 days after the original record date. Any business that
might have been transacted at the meeting originally called may be transacted
at any such adjourned meeting at which a quorum is present.
Section 5. Voting and Inspectors. Except as otherwise provided in the
Articles of Incorporation or by applicable law, at each stockholders'
meeting each stockholder shall be entitled to one vote for each share of stock
of the Corporation validly issued and outstanding and registered in his or
her name on the books of the Corporation on the record date fixed in
accordance with Section 5 of Article VI hereof, either in person or by proxy
appointed by instrument in writing subscribed by such stockholder or his or
her
2
duly authorized attorney, except that no shares held by the Corporation
shall be entitled to a vote. If no record date has been fixed, the record date
for the determination of stockholders entitled to notice of or to vote at a
meeting of stockholders shall be the later of the close of business on the day
on which notice of the meeting is mailed or the thirtieth day before the
meeting, or, if notice is waived by all stockholders, at the close of
business on the tenth day next preceding the day on which the meeting is
held.
Except as otherwise provided in the Articles of Incorporation or these
Bylaws or as required by provisions of the Investment Company Act of 1940, as
amended ("1940 Act"), all matters shall be decided by a vote of the majority
of the votes validly cast. The vote upon any question shall be by ballot
whenever requested by any person entitled to vote, but, unless such a request
is made, voting may be conducted in any way approved by the meeting.
At any meeting at which there is an election of Directors, the chairman of
the meeting may, and upon the request of the holders of ten percent of the
stock entitled to vote at such election shall, appoint two inspectors of
election who shall first subscribe an oath or affirmation to execute
faithfully the duties of inspectors at such election with strict impartiality
and according to the best of their ability, and shall, after the election,
make a certificate of the result of the vote taken. No candidate for the
office of Director shall be appointed as an inspector.
Section 6. Validity of Proxies. The right to vote by proxy shall exist only
if the instrument authorizing such proxy to act shall have been signed by the
stockholder or by his or her duly authorized attorney. Unless a proxy
provides otherwise, it shall not be valid more than eleven months after its
date. All proxies shall be delivered to the Secretary of the Corporation or
to the person acting as Secretary of the meeting before being voted, who
shall decide all questions concerning qualification of voters, the validity
of proxies, and the acceptance or rejection of votes. If inspectors of
election have been appointed by the chairman of the meeting, such inspectors
shall decide all such questions. A proxy with respect to stock held in the
name of two or more persons shall be valid if executed by one of them unless
at or prior to exercise of such proxy the Corporation receives a specific
written notice to the contrary from any one of them. A proxy purporting to be
executed by or on behalf of a stockholder shall be deemed valid unless
challenged at or prior to its exercise.
Section 7. Stock Ledger and List of Stockholders. It shall be the duty of the
Secretary or Assistant Secretary of the Corporation to cause an original or
duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for
visual inspection.
3
Any one or more persons, each of whom has been a stockholder of record of the
Corporation for more than six months next preceding such request, who owns in
the aggregate 5% or more of the outstanding capital stock of the Corporation,
may submit (unless the Corporation at the time of the request maintains a
duplicate stock ledger at its principal office in Maryland) a written request
to any officer of the Corporation or its resident agent in Maryland for a list
of the stockholders of the Corporation. Within 20 days after such a request,
there shall be prepared and filed at the Corporation's principal office in
Maryland a list containing the names and addresses of all stockholders of the
Corporation and the number of shares of each class held by each stockholder,
certified as correct by an officer of the Corporation, by its stock transfer
agent, or by its registrar.
Section 8. Action Without Meeting. Any action required or permitted to be
taken by stockholders at a meeting of stockholders may be taken without a
meeting if (1) all stockholders entitled to vote on the matter consent to the
action in writing, (2) all stockholders entitled to notice of the meeting but
not entitled to vote at it sign a written waiver of any right to dissent, and
(3) the consents and waivers are filed with the records of the meetings of
stockholders. Such consent shall be treated for all purposes as a vote at the
meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by operation of law, by the
Articles of Incorporation, or by these Bylaws, the business and affairs of
the Corporation shall be managed under the direction of and all the powers of
the Corporation shall be exercised by or under authority of its Board of
Directors.
Section 2. Number and Term of Directors. Except for the initial Board of
Directors, the Board of Directors shall consist of not fewer than three nor
more than fifteen Directors, as specified by a resolution of a majority of
the entire Board of Directors and at least one member of the Board of
Directors shall be a person who is not an "interested person" of the
Corporation, as that term is defined in the 1940 Act. All other directors may
be interested persons of the Corporation if the requirements of Section 10(d)
of the 1940 Act are met by the Corporation and its investment adviser.
Directors need not be stockholders of the Corporation. All acts done at any
meeting of the Directors or by any person acting as a Director, so long as
his or her successor shall not have been duly elected or appointed, shall,
notwithstanding that it be afterwards discovered that there was some defect
in the election of the Directors or of such person acting as a Director or
that they or any of them were disqualified, be as valid as if the Directors
or such other person, as the case may be, had been duly elected and
4
were or was qualified to be Directors or a Director of the Corporation. Each
Director shall hold office until his or her successor is elected and qualified
or until his or her earlier death, resignation or removal.
Section 3. Election. At the first annual meeting of stockholders, Directors
shall be elected by vote of the holders of a majority of the shares present
in person or by proxy and entitled to vote thereon. Thereafter, except as
otherwise provided in these Bylaws, the Directors shall be elected by the
stockholders at a meeting held on a date fixed by the board of Directors. A
plurality of all the votes cast at a meeting at which a quorum is present is
sufficient to elect a Director.
Section 4. Vacancies and Newly Created Directorships. If any vacancies shall
occur in the Board of Directors by reason of death, resignation, removal or
otherwise, or if the authorized number of Directors shall be increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the stockholders) may be filled by a majority of the
Directors then in office, although less than a quorum, except that a newly
created Directorship may be filled only by a majority vote of the entire
Board of Directors, provided, however, that if the stockholders of any class
of the Corporation's capital stock are entitled separately to elect one or
more directors, a majority of the remaining directors elected by that class
(if any) may fill any vacancy among the number of directors elected by that
class; provided further, however, that, at any time that there are
stockholders of the Corporation, immediately after filling such vacancy at
least two-thirds (2/3) of the Directors then holding office shall have been
elected to such office by the stockholders of the Corporation. In the event
that at any time, other than the time preceding the first annual
stockholders' meeting, less than a majority of the Directors of the
Corporation holding office at that time were elected by the stockholders, a
meeting of the stockholders shall be held promptly and in any event within
sixty days for the purpose of electing Directors to fill any existing
vacancies in the Board of Directors, unless the Securities and Exchange
Commission shall by order extend such period.
Section 5. Removal. At any stockholders' meeting duly called, provided a
quorum is present, the stockholders may remove any director from office
(either with or without cause) and may elect a successor or successors to
fill any resulting vacancies for the unexpired terms of the removed director
or directors. A majority of all votes represented at a meeting is sufficient
to remove a Director for cause.
Section 6. Chairman of the Board. The Board of Directors may, but shall not
be required to, elect a Chairman of the Board. Any Chairman of the Board
shall be elected from among the Directors of the Corporation and may hold
such office only so long as he or she
5
continues to be a Director. The Chairman, if any, shall preside at all
stockholders' meetings and at all meetings of the Board of Directors, and may
be ex officio a member of all committees of the Board of Directors. The
Chairman, if any, shall have such powers and perform such duties as may be
assigned from time to time by the Board of Directors.
Section 7. Annual and Regular Meetings. The annual meeting of the Board of
Directors for choosing officers and transacting other proper business shall
be held at such other time and place as the Board may determine. The Board of
Directors from time to time may provide by resolution for the holding of
regular meetings and fix their time and place within or outside the State of
Maryland. Except as otherwise provided in the 1940 Act, notice of such annual
and regular meetings need not be given, provided that notice of any change in
the time or place of such meetings shall be sent promptly to each Director not
present at the meeting at which such change was made, in the manner provided
for notice of special meetings. Except as otherwise provided under the 1940
Act, members of the Board of Directors or any committee designated thereby
may participate in a meeting of such Board or committee by means of a
conference telephone or similar communications equipment that allows all
persons participating in the meeting to hear each other at the same time.
Section 8. Special Meetings. Special meetings of the Board of Directors shall
be held whenever called by the Chairman of the Board, the President (or, in
the absence or disability of the President, by any Vice President), the
Treasurer or by two or more Directors, at the time and place (within or
without the State of Maryland) specified in the respective notice or waivers
of notice of such meetings. Notice of special meetings, stating the time and
place, shall be (1) mailed to each Director at his or her residence or regular
place of business at least three days before the day on which a special
meeting is to be held or (2) delivered to him or her personally or
transmitted to him or her by telegraph, telecopy, telex, cable or wireless at
least one day before the meeting.
Section 9. Waiver of Notice. No notice of any meeting need be given to any
Director who is present at the meeting or who waives notice of such meeting
in writing (which waiver shall be filed with the records of such meeting),
either before or after the time of the meeting.
Section 10. Quorum and Voting. At all meetings of the Board of Directors, the
presence of one half or more of the number of Directors then in office shall
constitute a quorum for the transaction of business, provided that there
shall be present at least two directors. In the absence of a quorum, a
majority of the Directors present may adjourn the meeting, from time to time,
until a quorum shall be present. The action of a majority of the Directors
present at a meeting at which a quorum is present shall
6
be the action of the Board of Directors, unless concurrence of a greater
proportion is required for such action by law, by the Articles of
Incorporation or by these Bylaws.
Section 11. Action Without a Meeting. Except as otherwise provided under the
1940 Act, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting
if a written consent to such action is signed by all members of the Board or
of such committee, as the case may be, and such written consent is filed with
the minutes of proceedings of the Board or committee.
Section 12. Compensation of Directors. Directors shall be entitled to receive
such compensation from the Corporation for their services as may from time to
time be determined by resolution of the Board of Directors.
ARTICLE IV
COMMITTEES
Section 1. Organization. By resolution adopted by the Board of Directors, the
Board may designate one or more committees of the Board of Directors,
including an Executive Committee. The Chairmen of such committees shall be
elected by the Board of Directors. Each committee must be comprised of two or
more members, each of whom must be a Director and shall hold committee
membership at the pleasure of the Board. The Board of Directors shall have
the power at any time to change the members of such committees and to fill
vacancies in the committees. The Board may delegate to these committees any of
its powers, except the power to declare a dividend or distribution on stock,
authorize the issuance of stock, recommend to stockholders any action
requiring stockholders' approval, amend these Bylaws, approve any merger or
share exchange which does not require stockholder approval, approve or
terminate any contract with an "investment adviser" or "principal
underwriter," as those terms are defined in the 1940 Act, or to take any
other action required by the 1940 Act to be taken by the Board of Directors.
Section 2. Executive Committee. Unless otherwise provided by resolution of
the Board of Directors, when the Board of Directors is not in session, the
Executive Committee, if one is designated by the Board, shall have and may
exercise all powers of the Board of Directors in the management of the
business and affairs of the Corporation that may lawfully be exercised by an
Executive Committee. The President shall automatically be a member of the
Executive Committee.
Section 3. Proceedings and Quorum. In the absence of an appropriate resolution
of the Board of Directors, each committee may adopt such rules and
regulations governing its proceedings, quorum
7
and manner of acting as it shall deem proper and desirable. In the event any
member of any committee it absent from any meeting, the members thereof
present at the meeting, whether or not they constitute a quorum, may appoint a
member of the Board of Directors to act in the place of such absent member.
Section 4. Other Committees. The Board of Directors may appoint other
committees, each consisting of one or more persons, who need not be
Directors. Each such committee shall have such powers and perform such duties
as may be assigned to it from time to time by the Board of Directors, but
shall not exercise any power which may lawfully be exercised only by the
Board of Directors or a committee thereof.
ARTICLE V
OFFICERS
Section 1. General. The officers of the Corporation shall be a President, a
Secretary, and a Treasurer, and may include one or more Vice Presidents,
Assistant Secretaries or Assistant Treasurers, and such other officers as may
be appointed in accordance with the provisions of Section 9 of this Article.
Section 2. Election, Tenure and Qualifications. The officers of the
Corporation, except those appointed as provided in Section 9 of this Article
V, shall be elected by the Board of Directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting,
and thereafter annually at its annual meeting. If any officers are not
elected at any annual meeting, such officers may be elected at any subsequent
regular or special meeting of the Board. Except as otherwise provided in this
Article V, each officer elected by the Board of Directors shall hold office
until the next annual meeting of the Board of Directors and until his or her
successor shall have been elected and qualified. Any person may hold one or
more offices of the Corporation except that no one person may serve
concurrently as both President and Vice President. A person who holds more
than one office in the Corporation may not act in more than one capacity to
execute, acknowledge, or verify an instrument required by law to be
executed, acknowledged, or verified by more than one officer. No officer need
be a Director.
Section 3. Vacancies and Newly Created Officers. If any vacancy shall occur
in any office by reason of death, resignation, removal, disqualification or
other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Board of Directors at any regular or
special meeting or, in the case of any office created pursuant to Section 9
hereof, by any officer upon whom such power shall have been conferred by the
Board of Directors.
8
Section 4. Removal and Resignation. Any officer may be removed from office by
the vote of a majority of the members of the Board of Directors given at a
regular meeting or any special meeting called for such purpose, if the Board
has determined the best interests of the Corporation will be served by
removal of that officer. Any officer may resign from office at any time by
delivering a written resignation to the Board of Directors, the President,
the Secretary, or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 5. President. The President shall be the chief executive officer of
the Corporation and, in the absence of the Chairman of the Board or if no
Chairman of the Board has been elected, shall preside at all stockholders'
meetings and at all meetings of the Board of Directors and shall in general
exercise the powers and perform the duties of the Chairman of the Board.
Subject to the supervision of the Board of Directors, the President shall
have general charge of the business, affairs and property of the Corporation
and general supervision over its officers, employees and agents. Except as
the Board of Directors may otherwise order, the President may sign in the
name and on behalf of the Corporation all deeds, bonds, contracts, or
agreements. The President shall exercise such other powers and perform such
other duties as from time to time may be assigned by the Board of Directors.
Section 6. Vice President. The Board of Directors may from time to time elect
one or more Vice Presidents who shall have such powers and perform such
duties as from time to time may be assigned to them by the Board of Directors
or the President. At the request of, or in the absence or in the event of the
disability of, the President, the Vice President (or, if there are two or
more Vice Presidents, then the senior of the Vice Presidents present and able
to act) may perform all the duties of the President and, when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President.
Section 7. Treasurer and Assistant Treasurers. The Treasurer shall be the
principal financial and accounting officer of the Corporation and shall have
general charge of the finances and books of account of the Corporation. Except
as otherwise provided by the Board of Directors, the Treasurer shall have
general supervision of the funds and property of the Corporation and of the
performance by the Custodian of its duties with respect thereto. The Treasurer
shall render to the Board of Directors, whenever directed by the Board, an
account of the financial condition of the Corporation and of all transactions
as Treasurer; and as soon as possible after the close of each financial year
the Treasurer shall make and submit to the Board of Directors a like report
for such financial year. The Treasurer shall perform all acts incidental to
the office of Treasurer, subject to the control of the Board of Directors.
9
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
Section 8. Secretary and Assistant Secretaries. The Secretary shall attend to
the giving and serving of all notices of the Corporation and shall record all
proceedings of the meetings of the stockholders and Directors in books to be
kept for that purpose. The Secretary shall keep in safe custody the seal of
the Corporation, and shall have responsibility for the records of the
Corporation, including the stock books and such other books and papers as the
Board of Directors may direct and such books, reports, certificates and other
documents required by law to be kept, all of which shall at all reasonable
times be open to inspection by any Director. The Secretary shall perform such
other duties which appertain to this office or as may be required by the
Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
Section 9. Subordinate Officers. The Board of Directors from time to time may
appoint such other officers and agents as it may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers or agents
the power to appoint any such subordinate officers or agents and to prescribe
their respective rights, terms of office, authorities and duties. Any
officer or agent appointed in accordance with the provisions of this Section
9 may be removed, either with or without cause, by any officer upon whom such
power of removal shall have been conferred by the Board of Directors.
Section 10. Remuneration. The salaries or other compensation of the officers
of the Corporation shall be fixed from time to time by resolution of the Board
of Directors in the manner provided by Section 10 of Article III, except that
the Board of Directors may by resolution delegate to any person or group of
persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 9 of this Article V.
Section 11. Surety Bond. The Board of Directors may require any officer or
agent of the Corporation to execute a bond (including, without limitation,
any bond required by the 1940 Act and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder) to the Corporation
in such sum and with such surety or sureties as the Board of Directors may
determine,
10
conditioned upon the faithful performance of his or her duties to the
Corporation, including responsibility for negligence and for the accounting
of any of the Corporation's property, funds or securities that may come into
his or her hands.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. The interest of each stockholder of the
Corporation shall be evidenced by certificates for shares of stock in such
form as the Board of Directors may from time to time authorize, provided,
however, the Board of Directors may, in its discretion, authorize the
issuance of non-certificated shares. No certificate shall be valid unless it
is signed by the President or a Vice President and countersigned by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
of the Corporation and sealed with the seal of the Corporation, or bears the
facsimile signatures of such officers and a facsimile of such seal. In case
any officer who shall have signed any such certificate, or whose facsimile
signature has been placed thereon, shall cease to be such an officer (because
of death, resignation or otherwise) before such certificate is issued, such
certificate may be issued and delivered by the Corporation with the same
effect as if he or she were such officer at the date of issue.
In the event that the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in its
discretion and at any time, discontinue the issuance of share certificates
and may, by written notice to the registered owners of each certificated
share, require the surrender of share certificates to the Corporation for
cancellation. Such surrender and cancellation shall not affect the ownership
of shares of the Corporation.
Section 2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder of record thereof
in person or by his or her duly authorized attorney or legal representative
(i) upon surrender and cancellation of a certificate or certificates for the
same number of shares of the same class, duly endorsed or accompanied by
proper instruments of assignment and transfer, with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require, or (ii) as otherwise prescribed by the Board of Directors. The
shares of stock of the Corporation may be freely transferred, and the Board
of Directors may, from time to time, adopt rules and regulations with
reference to the method of transfer of the shares of stock of the
Corporation. The Corporation shall be entitled to treat the holder of record
of any share of stock as the absolute owner thereof for all purposes, and
accordingly shall not be bound to recognize any legal, equitable or other
claim or interest in such share on the part of any other person, whether or
not it shall
11
have express or other notice thereof, except as otherwise expressly provided
by law or the statutes of the State of Maryland.
Section 3. Stock Ledgers. The stock ledgers of the Corporation, containing the
names and addresses of the stockholders and the number of shares held by them
respectively, shall be kept at the principal offices of the Corporation or,
if the Corporation employs a transfer agent, at the offices of the transfer
agent of the Corporation.
Section 4. Transfer Agents and Registrars. The Board of Directors may from
time to time appoint or remove transfer agents and registrars of transfers
for shares of stock of the Corporation, and it may appoint the same person as
both transfer agent and registrar. Upon any such appointment being made all
certificates representing shares of capital stock thereafter issued shall be
countersigned by one of such transfer agents or by one of such registrars or
by both and shall not be valid unless so countersigned. If the same person
shall be both transfer agent and registrar, only one countersignature by such
person shall be required.
Section 5. Fixing of Record Date. The Board of Directors may fix in advance a
date as a record date for the determination of the stockholders entitled to
notice of or to vote at any stockholders' meeting or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or to
receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, provided
that (1) such record date shall be within ninety days prior to the date on
which the particular action requiring such determination will be taken; (2)
the transfer books shall not be closed for a period longer than twenty days;
and (3) in the case of a meeting of stockholders, the record date shall be
at least ten days before the date of the meeting.
Section 6. Lost, Stolen or Destroyed Certificates. Before issuing a new
certificate for stock of the Corporation alleged to have been lost, stolen or
destroyed, the Board of Directors or any officer authorized by the Board may,
in its discretion, require the owner of the lost, stolen or destroyed
certificate (or his or her legal representative) to give the Corporation a
bond or other indemnity, in such form and in such amount as the Board or any
such officer may direct and with such surety or sureties as may be
satisfactory to the Board or any such officer, sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
12
ARTICLE VII
FISCAL YEAR AND ACCOUNTANT
Section 1. Fiscal Year. The fiscal year of the Corporation shall end on such
date in each year as the Board of Directors shall from time to time
determine.
Section 2. Accountant.
A. The Corporation shall employ an independent public accountant or a
firm of independent public accountants as its Accountant to examine the
accounts of the Corporation and to sign and certify financial statements
filed by the Corporation. The Accountant's certificates and reports shall be
addressed both to the Board of Directors and to the stockholders. The
employment of the Accountant shall be conditioned upon the right of the
Corporation to terminate the employment forthwith without any penalty by vote
of a majority of the outstanding voting securities at any stockholders'
meeting called for that purpose.
B. A majority of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Corporation shall
select the Accountant at any meeting held within thirty days before or after
the beginning of the fiscal year of the Corporation or before the annual
stockholders' meeting in that year. The selection shall be submitted for
ratification or rejection at the next succeeding annual stockholders'
meeting. If the selection is rejected at that meeting, the Accountant shall
be selected by majority vote of the Corporation's outstanding voting
securities, either at the meeting at which the rejection occurred or at a
subsequent meeting of stockholders called for the purpose of selecting an
Accountant.
C. Any vacancy occurring between annual meetings due to the resignation
of the Accountant may be filled by the vote of a majority of the members of
the Board of Directors who are not interested persons.
ARTICLE VIII
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Corporation shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments owned by the
Corporation. The Custodian (and any sub-custodian) shall be a bank or trust
company of good standing having an aggregate capital, surplus, and undivided
profits not less than fifty million dollars ($50,000,000) or such other
financial institution or other entity as shall be permitted by rule or order
of the Securities and Exchange Commission. The
13
Custodian shall be appointed from time to time by the Board of Directors,
which shall fix it remuneration.
Section 2. Termination of Custodian Agreement. Upon termination of the
agreement for services with the Custodian or inability of the Custodian to
continue to serve, the Board of Directors shall promptly appoint a successor
Custodian, but in the event that no successor Custodian can be found who has
the required qualifications and is willing to serve, the Board of
Directors shall call as promptly as possible a special meeting of the
stockholders to determine whether the Corporation shall function without
a Custodian or shall be liquidated. If so directed by resolution of the Board
of Directors or by vote of the holders of a majority of the outstanding
shares of stock of the Corporation, the Custodian shall deliver and pay over
all property of the Corporation held by it as specified in such vote.
Section 3. Other Arrangements. The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
Section 1. Indemnification of Officers, Directors, Employees and Agents. The
Corporation shall indemnify its present and past directors, officers,
employees and agents, and any persons who are serving or have served at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, or enterprise, to the
full extent provided and allowed by Section 2-418 of the Annotated
Corporations and Associations Code of Maryland concerning corporations, as
amended from time to time or any other applicable provisions of law.
Notwithstanding anything herein to the contrary, no director, officer,
investment adviser or principal underwriter of the Corporation shall be
indemnified in violation of Sections 17(h) and (i) of the 1940 Act. Expenses
incurred by any such person in defending any proceeding to which he or she is
a party by reason of service in the above-referenced capacities shall be paid
in advance or reimbursed by the Corporation to the full extent permitted by
law, including Sections 17(h) and (i) of the 1940 Act.
Section 2. Insurance of Officers, Directors, Employees and Agents. The
Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against any liability asserted against that person and
incurred by
14
that person in or arising out of his or her position, whether or
not the Corporation would have the power to indemnify him or her against such
liability.
Section 3. Amendment. No amendment, alteration or repeal of this Article or
the adoption, alteration or amendment of any other provision of the Articles
of Incorporation or Bylaws inconsistent with this Article shall adversely
affect any right or protection of any person under this Article with respect
to any act or failure to act which occurred prior to such amendment,
alteration, repeal or adoption.
ARTICLE X
AMENDMENTS
Section 1. General. Except as provided in Section 2 of this Article X, all
Bylaws of the Corporation, whether adopted by the Board of Directors or the
stockholders, shall be subject to amendment, alteration or repeal, and new
Bylaws may be made by the affirmative vote of either: (1) the holders of
record of a majority of the outstanding shares of stock of the Corporation
entitled to vote, at any annual or special meeting, the notice or waiver of
notice of which shall have specified or summarized the proposed amendment,
alteration, repeal or new Bylaw; or (2) a majority of the Directors, at any
regular or special meeting the notice or waiver of notice of which shall have
specified or summarized the proposed amendment, alteration, repeal or new
Bylaw.
Section 2. By Stockholders Only. No amendment of any section of these Bylaws
shall be made except by the stockholders of the Corporation if the Bylaws
provide that such section may not be amended, altered or repealed except by
the stockholders. From and after the issue or any shares of the capital stock
of the Corporation, no amendment, alteration or repeal of this Article X
shall be made except by the affirmative vote of the holders of either: (a)
more than two-thirds of the Corporation's outstanding shares present at a
meeting at which the holders of more than fifty percent of the outstanding
shares are present in person or by proxy, or (b) more than fifty percent of
the Corporation's outstanding shares.
15
AMENDMENT TO BY-LAWS
GLOBAL SMALL CAP FUND INC.
CERTIFICATE OF VICE PRESIDENT AND ASSISTANT SECRETARY
I, Joan L. Cohen, Vice President and Assistant Secretary of Global Small
Cap Fund Inc. ("Fund"), hereby certify that, at a duly convened meeting of the
Board of Directors of the Fund held on September 28, 1994, the Directors adopted
the following resolution:
RESOLVED, that the following language replace the second sentence and
revise the first sentence of Article III, Section 6 of the Fund's by-laws:
"The right to vote by proxy shall exist only if the proxy is
authorized to act by (1) a written instrument dated not more than
eleven months prior to the meeting and executed either by the
stockholder or by his or her duly authorized attorney in fact (who may
be so authorized by a writing or by any non-written means permitted by
the laws of the State of Maryland) of (2) such electronic, telephonic,
computerized or other alternative means as may be approved by a
resolution adopted by the Directors."
Dated: September 19, 1995
By: /s/ Joan L. Cohen
--------------------------------------
Joan L. Cohen
Vice President and Assistant Secretary
Global Small Cap Fund Inc.
New York, New York (ss)
Subscribed and sworn before me this 19th day of September, 1995.
/s/ Jennifer Farrell
------------------------
Notary Public
JENNIFER FARRELL
Notary Public, State of New York
No. 01FA5026553
Qualified in New York County
Commission Expires April 18, 1996
<PAGE>
EXHIBIT A
FORM OF PROPOSED SUB-ADVISORY AGREEMENT WITH MITCHELL HUTCHINS
Agreement made as of , 1995, between MITCHELL HUTCHINS ASSET
MANAGEMENT INC. ('Mitchell Hutchins'), a Delaware corporation, and GE Investment
Management Incorporated ('Sub-Adviser'), a Delaware corporation (the
'Agreement').
RECITALS
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Contract dated October 6, 1993, ('Management Agreement') with
Global Small Cap Fund Inc. ('Fund'), a Maryland corporation that is a closed-end
management investment company registered under the Investment Company Act of
1940, as amended ('1940 Act').
(2) Mitchell Hutchins wishes to retain the Sub-Adviser to furnish certain
investment advisory services to Mitchell Hutchins and the Fund, and the
Sub-Adviser is willing to furnish those services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Appointment. Mitchell Hutchins hereby appoints the Sub-Adviser as an
investment sub-adviser with respect to the Fund for the period and on the terms
set forth in this Agreement. The Sub-Adviser accepts that appointment and agrees
to render the services herein set forth, for the compensation herein provided.
2. Duties as Sub-Adviser.
(a) Subject to the supervision of and any guidelines adopted by the Fund's
Board of Directors (the 'Board'), the Sub-Adviser will provide a continuous
investment program for the Fund, including investment research and management.
The Sub-Adviser will determine from time to time what investments will be
purchased, retained or sold by the Fund. The Sub-Adviser will be responsible for
placing purchase and sell orders for investments and for other related
transactions. The Sub-Adviser will provide services under this Agreement in
accordance with the Fund's investment objective, policies and restrictions as
stated in the Fund's Registration Statement.
(b) The Sub-Adviser agrees that, in placing orders with brokers, it will
obtain the best net result in terms of price and execution; provided that, on
behalf of the Fund, the Sub-Adviser may, in its discretion, use brokers who
provide the Fund with research, analysis, advice and similar services to execute
portfolio transactions on behalf of the Fund, and the Sub-Adviser may pay to
those brokers in return for brokerage and research services a higher commission
than may be charged by other brokers, subject to the Sub-Adviser's determining
in good faith that such commission is reasonable in terms either of the
particular transaction or of the overall responsibility of the Sub-Adviser 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.
In no instance will portfolio securities be purchased from or sold to the
Sub-Adviser, or any affiliated person thereof, except in accordance with the
federal securities laws and the rules and regulations thereunder. Whenever the
Sub-Adviser simultaneously places orders to purchase or sell the same security
on behalf of the Fund and one or more other accounts advised by the Sub-Adviser,
the orders will be allocated as to price and amount among all such accounts in a
manner believed to be equitable by the Sub-Adviser over time to each account.
Mitchell Hutchins recognizes that in some cases this procedure may adversely
affect the results obtained for the Fund.
(c) The Sub-Adviser will maintain all books and records required to be
maintained by the Sub-Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on behalf of the
Fund, and will furnish the Board and Mitchell Hutchins with such periodic and
special reports as the Board or Mitchell Hutchins reasonably may request. In
compliance with the requirements of Rule 31a-3 under
A-1
<PAGE>
the 1940 Act, the Sub-Adviser hereby agrees that all records which it maintains
for the Fund are the property of the Fund, agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any records which it maintains for
the Fund and which are required to be maintained by Rule 31a-1 under the 1940
Act, and further agrees to surrender promptly to the Fund any records which it
maintains for the Fund upon request by the Fund.
(d) At such times as shall be reasonably requested by the Board or
Mitchell Hutchins, the Sub-Adviser will provide the Board and Mitchell Hutchins
with economic and investment analyses and reports as well as quarterly reports
setting forth the Fund's performance and make available to the Board and
Mitchell Hutchins any economic, statistical and investment services normally
available to institutional or other customers of the Sub-Adviser.
(e) In accordance with procedures adopted by the Board, as amended from
time to time, the Sub-Adviser is responsible for assisting in the fair valuation
of any illiquid portfolio securities and will assist in providing independent
sources of market value for all other portfolio securities.
3. Further Duties. In all matters relating to the performance of this
Agreement, the Sub-Adviser will act in conformity with the Fund's Articles of
Incorporation, By-Laws and currently effective registration statement under the
1940 Act and any amendments or supplements thereto ('Registration Statement')
and with the written instructions and directions of the Board and Mitchell
Hutchins and will comply with the requirements of the 1940 Act, the Investment
Advisers Act of 1940, as amended, ('Advisers Act'), the rules under each, and
Subchapter M of the Internal Revenue Code as applicable to regulated investment
companies. In addition, the Sub-Adviser will act in conformity with all other
applicable federal and state laws and regulations either as reflected in the
Registration Statement or otherwise provided in writing to the Sub-Adviser by
Mitchell Hutchins. Mitchell Hutchins agrees to provide to the Sub-Adviser copies
of the Fund's Articles of Incorporation, By-Laws, Registration Statement,
written instructions and directions of the Board and Mitchell Hutchins, and any
amendments or supplements to any of these materials as soon as practicable after
such materials become available.
4. Exclusivity. During the term of this Agreement, the Sub-Adviser agrees
that it will not provide investment advice on a discretionary or
non-discretionary basis for any global equity investment products offered to
retail customers in the United States by broker-dealers listed on Schedule A.
The Sub-Adviser shall deliver to Mitchell Hutchins in writing prompt and regular
reports of the Sub-Adviser's investment advisory activities in sufficient detail
to permit Mitchell Hutchins to monitor the terms of this Agreement.
5. Expenses. During the term of this Agreement, the Sub-Adviser will bear
all expenses incurred by it in connection with its investment sub-advisory
services under this Agreement.
6. Compensation.
(a) For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Agreement, Mitchell Hutchins, not the Fund, will pay to the
Sub-Adviser a fee, computed daily and payable monthly, as computed in the manner
set forth in Schedule B, together with a schedule showing the manner in which
the fee was computed.
(b) The fee shall be computed daily and payable monthly to the Sub-Adviser
on or before the fifteenth business day of the next succeeding calendar month.
(c) If this Agreement becomes effective or terminates before the end of
any month, the fee for the period from the effective date to the end of the
month or from the beginning of such month to the date of termination, as the
case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
7. Limitation of Liability. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund, the
Trust or its shareholders or by Mitchell Hutchins in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross
A-2
<PAGE>
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
8. Indemnification.
(a) Mitchell Hutchins agrees to indemnify GEIM, its officers and
directors, and any person who controls GEIM within the meaning of Section 15 of
the Securities Act of 1933 ('1933 Act') for any loss or expense (including
attorneys' fees) arising out of any claim, demand, action or suit in the event
that GEIM has been found to be without fault and Mitchell Hutchins or its parent
company, PaineWebber Incorporated ('PaineWebber'), has been found at fault (i)
by the final judgment of a court of competent jurisdiction or (ii) in any order
of settlement of any claim, demand, action or suit that has been approved by the
Board of Directors of Mitchell Hutchins or PaineWebber.
(b) GEIM agrees to indemnify Mitchell Hutchins, its officers and
directors, and any person who controls Mitchell Hutchins within the meaning of
Section 15 of the 1933 Act for any loss or expense (including attorneys' fees)
arising out of any claim, demand, action or suit in the event that Mitchell
Hutchins has been found to be without fault and GEIM, or its parent company,
General Electric Company ('GE'), has been found at fault (i) by the final
judgment of a court of competent jurisdiction or (ii) in any order of settlement
of any claim, demand, action or suit that has been approved by the Board of
Directors of GEIM or GE.
9. Representations of Sub-Adviser. The Sub-Adviser represents, warrants
and agrees as follows:
(a) The Sub-Adviser (i) is registered as an investment adviser under the
Advisers Act and will continue to be so registered for so long as this Agreement
remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act
from performing the services contemplated by this Agreement; (iii) has met, and
will seek to continue to meet for so long as this Agreement remains in effect,
any other applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency, necessary to
be met in order to perform the services contemplated by this Agreement; (iv) has
the authority to enter into and perform the services contemplated by this
Agreement; and (v) will promptly notify Mitchell Hutchins of the occurrence of
any event that would disqualify the Sub-Adviser from serving as an investment
adviser of an investment company pursuant to Section 9(a) of the 1940 Act or
otherwise.
(b) The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and will provide Mitchell
Hutchins and the Board with a copy of that code of ethics, together with
evidence of its adoption. Within fifteen days of the end of the last calendar
quarter of each year that this Agreement is in effect, the president or a
vice-president of the Sub-Adviser shall certify to Mitchell Hutchins that the
Sub-Adviser has complied with the requirements of Rule 17j-1 during the previous
year and that there has been no violation of the Sub-Adviser's code of ethics
or, if such a violation has occurred, that appropriate action was taken in
response to such violation. Upon the written request of Mitchell Hutchins, the
Sub-Adviser shall permit Mitchell Hutchins, its employees or its agents to
examine the reports required to be made to the Sub-Adviser by Rule 17j-1(c)(1)
and all other records relevant to the Sub-Adviser's code of ethics.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of its Form
ADV as most recently filed with the Securities and Exchange Commission ('SEC')
and promptly will furnish a copy of all amendments to Mitchell Hutchins at least
annually.
(d) The Sub-Adviser will notify Mitchell Hutchins of any change of control
of the Sub-Adviser, including any change of its general partners or 25%
shareholders, as applicable, and any changes in the key personnel of the
Sub-Adviser, in each case prior to or promptly after such change.
A-3
<PAGE>
10. Representations and Warranties of Mitchell Hutchins. Mitchell
Hutchins represents, warrants and agrees as follows:
(a) Mitchell Hutchins (i) is registered as an investment adviser under the
Advisers Act and will continue to be so registered for so long as this Agreement
remains in effect; (ii) is not prohibited by the 1940 Act from performing the
services contemplated by the Management Agreement; (iii) has met, and will seek
to continue to meet for so long as this Agreement remains in effect, any other
applicable federal or state requirements, or the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by the Management Agreement; (iv) has the
authority to enter into and perform the services contemplated by the Management
Agreement; and (v) will promptly notify the Sub-Adviser of the occurrence of any
event that would disqualify Mitchell Hutchins from serving as an investment
adviser of an investment company pursuant to Section 9(a) of the 1940 Act or
otherwise.
(b) Mitchell Hutchins agrees that it will notify GEIM, to the extent
possible, within a reasonable period of time prior to any termination of this
Agreement by Mitchell Hutchins pursuant to Section 11(c) (including any
termination by assignment resulting from a foreseeable change in control of
Mitchell Hutchins that is a matter of public information), and that it will
notify GEIM promptly following any other termination of this Agreement pursuant
to Section 11(c).
11. Duration and Termination.
(a) This Agreement shall become effective upon the date first above
written, provided that this Agreement shall not take effect unless it has first
been approved (i) by a vote of a majority of those directors of the Fund who are
not parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by a vote of a majority of outstanding voting securities of the Fund.
(b) Unless sooner terminated as provided herein, this Agreement shall
continue in effect for two years from the above written date. Thereafter, if not
terminated, this Agreement will continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those directors of the Fund who
are not parties to this Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or by the holders of a vote of a majority of the outstanding
voting securities of the Fund.
(c) Notwithstanding the foregoing, this Agreement may be terminated at any
time, without the payment of any penalty, by vote of the Board or by a vote of a
majority of the outstanding voting securities of the Fund on 60 days' written
notice to the Sub-Adviser. This Agreement may also be terminated, without the
payment of any penalty, by Mitchell Hutchins: (i) upon 120 days' written notice
to the Sub-Adviser; (ii) upon material breach by the Sub-Adviser of any of the
representations and warranties set forth in Paragraph 9 of this Agreement; or
(iii) if the Sub-Adviser becomes unable to discharge its duties and obligations
under this Agreement, including circumstances such as financial insolvency of
the Sub-Adviser or other circumstances that could adversely affect the Fund. The
Sub-Adviser may terminate this Agreement at any time, without the payment of any
penalty, on 120 days' written notice to Mitchell Hutchins. This Agreement will
terminate automatically in the event of its assignment or upon termination of
the Management Agreement.
12. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment to the terms of this
Agreement shall be effective until approved by vote of a majority of the Fund's
outstanding voting securities (unless the Fund receives an SEC order permitting
it to modify the Agreement without such vote).
A-4
<PAGE>
13. Governing Law. This Agreement shall be construed in accordance with
the 1940 Act and the laws of the State of Delaware, without giving effect to the
conflicts of laws principles thereof. To the extent that the applicable laws of
the State of Delaware conflict with the applicable provisions of the 1940 Act,
the latter shall control.
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms 'majority of the outstanding voting securities,'
'affiliated person,' 'interested person,' 'assignment,' 'broker,' 'investment
adviser,' 'net assets,' 'sale,' 'sell' and 'security' shall have the same
meaning as such terms have in the 1940 Act, subject to such exemption as may be
granted by the SEC by any rule, regulation or order. Where the effect of a
requirement of the federal securities laws reflected in any provision of this
Agreement is made less restrictive by a rule, regulation or order of the SEC,
whether of special or general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order. This Agreement may be
signed in counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized signatories as of the date and year first
above written.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT
INC.
By:
--------------------------------------
Name:
Title:
Attest: GE INVESTMENT MANAGEMENT INCORPORATED
By:
--------------------------------------
Name:
Title:
A-5
<PAGE>
SCHEDULE A
RETAIL BROKER DEALERS
Alex. Brown & Sons Incorporated
A.G. Edwards & Sons, Inc.
Dean Witter Reynolds, Inc.
E.D. Jones
Kemper Financial Services, Kemper Securities Group, Inc.
Legg Mason Wood Walker Incorporated
Merrill Lynch Pierce Fenner & Smith Incorporated
Prudential Securities Incorporated
Raymond James & Associates, Inc.
Smith Barney Inc.
<PAGE>
SCHEDULE B
FUND ANNUAL FEE RATE
- -------------------------------------- --------------------------------------
Global Small Cap Fund Inc. 0.50% of average weekly net assets
<PAGE>
EXHIBIT 99.j
CUSTODIAN CONTRACT
Between
and
STATE STREET BANK AND TRUST COMPANY
Global/Series/Trust
21E593
<PAGE>
TABLE OF CONTENTS
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Page
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1. Employment of Custodian and Property to be Held By
It...................................................... 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States.. 2
2.1 Holding Investments................................ 2
2.2 Delivery of Securities............................. 2
2.3 Registration of Securities......................... 5
2.4 Bank Accounts...................................... 5
2.5 Availability of Federal Funds...................... 5
2.6 Collection of Income............................... 6
2.7 Payment of Fund Monies............................. 6
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased............................... 7
2.9 Appointment of Agents.............................. 8
2.10 Deposit of Fund Assets in Securities System........ 8
2.11 Fund Assets Held in the Custodian's Direct
Paper System...................................... 10
2.12 Segregated Account................................ 10
2.13 Ownership Certificates for Tax Purposes........... 11
2.14 Proxies........................................... 11
2.15 Communications Relating to Portfolio
Securities........................................ 11
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States............. 12
3.1 Appointment of Foreign Sub-Custodians............. 12
3.2 Assets to be Held................................. 12
3.3 Foreign Securities Systems........................ 12
3.4 Holding Securities................................ 13
3.5 Agreements with Foreign Banking Institutions...... 13
3.6 Access of Independent Accountants of the Fund..... 13
3.7 Reports by Custodian.............................. 14
3.8 Transactions in Foreign Custody Account........... 14
3.9 Liability of Foreign Sub-Custodians............... 14
3.10 Liability of Custodian............................ 15
3.11 Reimbursement for Advances........................ 15
3.12 Monitoring Responsibilities....................... 15
3.13 Branches of U.S. Banks............................ 16
3.14 Tax Law........................................... 16
4. Payments for Sales or Repurchases or Redemptions
of Shares of the Fund.................................. 16
5. Proper Instructions.................................... 17
6. Actions Permitted Without Express Authority............ 18
7. Evidence of Authority.................................. 18
<PAGE>
8. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income...... 18
9. Records................................................ 19
10. Opinion of Fund's Independent Accountants.............. 19
11. Reports to Fund by Independent Public Accountants...... 19
12. Compensation of Custodian.............................. 20
13. Responsibility of Custodian............................ 20
14. Effective Period, Termination and Amendment............ 22
15. Successor Custodian.................................... 22
16. Interpretive and Additional Provisions................. 23
17. Additional Funds....................................... 24
18. Massachusetts Law to Apply............................. 24
19. Prior Contracts........................................ 24
20. Shareholder Communications Election.................... 24
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between , a business trust organized and existing
under the laws of Delaware, having its principal place of business at
1285 Avenue of Americas, New York, New York, 10019 hereinafter called
the "Fund", and State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin
Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of the
Fund, including securities which the Fund, on behalf of the applicable Portfolio
desires to be held in places within the United States ("domestic securities")
and securities it desires to be held outside the United States ("foreign
securities") pursuant to the provisions of the Declaration of Trust. The Fund
agrees to deliver to the Custodian all securities and cash of the Portfolios,
and all payments of income, payments of principal or capital distributions
received by it with respect to all securities owned by the Fund from time to
time, and the cash consideration received by it for such new or treasury shares
of
1
<PAGE>
beneficial interest of the Fund ("Shares") as may be issued or sold from time
to time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such sub-
custodian has to the Custodian. The Custodian may employ as sub-custodian for
the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
------------------------------------------------------------------------
Custodian in the United States
------------------------------
2.1 Holding Investments. The Custodian shall hold and physically segregate for
-------------------
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, (each, a "U.S. Securities System") and (b)
commercial paper of an issuer for which State Street Bank and Trust Company
acts as issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian (the "Direct Paper
System") pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
----------------------
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund on behalf of the applicable Portfolio,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2
<PAGE>
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
--------
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
3
<PAGE>
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
--- ----
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
--- ----
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of
4
<PAGE>
requests by holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
--- ----
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized in
------
writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent appointed pursuant
to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable; provided, however, that
--------
every such bank or trust company shall be qualified to act as a custodian
under the
5
<PAGE>
Investment Company Act of 1940 and that each such bank or trust company and
the funds to be deposited with each such bank or trust company shall on
behalf of each applicable Portfolio be approved by vote of a majority of
the Board of Trustees of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund on
-----------------------------
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
--------------------
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of
the income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund
----------------------
on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies
of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures
6
<PAGE>
contracts to the Custodian (or any bank, banking firm or trust company
doing business in the United States or abroad which is qualified under
the Investment Company Act of 1940, as amended, to act as a custodian
and has been designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or in the name of a
nominee of the Custodian referred to in Section 2.3 hereof or in
proper form for transfer; (b) in the case of a purchase effected
through a Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a purchase involving
the Direct Paper System, in accordance with the conditions set forth
in Section 2.11; (d) in the case of repurchase agreements entered into
between the Fund on behalf of the Portfolio and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or
through an entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Portfolio of securities owned by
the Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Portfolio or (e) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank pursuant to
Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7
<PAGE>
7) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
-------------------------------------------------------------------
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
--------
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
--------------------------------------------
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
8
<PAGE>
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Portfolio. Copies of all advices from
the Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account of the
Portfolio in the form of a written advice or notice and shall furnish
to the Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the Securities System for
the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the Securities
System; at the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim
against the
9
<PAGE>
Securities System or any other person which the Custodian may have as
a consequence of any such loss or damage if and to the extent that the
Portfolio has not been made whole for any such loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may
--------------------------------------------------------
deposit and/or maintain securities owned by a Portfolio in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the Securities System for the account of the
Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions from the Fund on behalf of each applicable Portfolio establish
and maintain a segregated account or
10
<PAGE>
accounts for and on behalf of each such Portfolio, into which account or
accounts may be transferred cash and/or securities, including securities
maintained in an account by the Custodian pursuant to Section 2.10 hereof,
(i) in accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered under
the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Portfolio, (ii) for purposes of
segregating cash or government securities in connection with options
purchased, sold or written by the Portfolio or commodity futures contracts
or options thereon purchased or sold by the Portfolio, (iii) for the
purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment companies and
(iv) for other proper corporate purposes, but only, in the case of clause
--- ----
(iv), upon receipt of, in addition to Proper Instructions from the Fund on
behalf of the applicable Portfolio, a certified copy of a resolution of the
Board of Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring such
purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities held
-------
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the provisions
-----------------------------------------------
of Section 2.3, the Custodian shall transmit promptly to the Fund for each
Portfolio all written
11
<PAGE>
information (including, without limitation, pendency of calls and
maturities of domestic securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by the
Fund on behalf of the Portfolio and the maturity of futures contracts
purchased or sold by the Portfolio) received by the Custodian from issuers
of the securities being held for the Portfolio. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Portfolio desires to
take action with respect to any tender offer, exchange offer or any other
similar transaction, the Portfolio shall notify the Custodian at least
three business days prior to the date on which the Custodian is to take
such action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
-------------------------------------------------------------------------
of the United States
--------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
-------------------------------------
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with a
certified resolution of the Fund's Board of Trustees, the Custodian and the
Fund may agree to amend Schedule A hereto from time to time to designate
additional foreign banking institutions and foreign securities depositories
to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such sub-
custodians for maintaining custody of the Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
-----------------
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
--------------------------
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in a clearing agency which acts as a securities depository or in
a book-entry system for the
12
<PAGE>
central handling of securities located outside of the United States (each a
"Foreign Securities System") only through arrangements implemented by the
foreign banking institutions serving as sub-custodians pursuant to the
terms hereof (Foreign Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements containing
the provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other non-cash
-------------------
property for all of its customers, including the Fund, with a Foreign Sub-
custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
----------------
records of the Custodian with respect to securities and other non-cash
property of the Fund which are maintained in such account shall identify by
book-entry those securities and other non-cash property belonging to the
Fund and (ii) the Custodian shall require that securities and other non-
cash property so held by the Foreign Sub-custodian be held separately from
any assets of the Foreign Sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
--------------------------------------------
foreign banking institution shall be substantially in the form set forth in
Exhibit 1 hereto and shall provide that: (a) the assets of each Portfolio
will not be subject to any right, charge, security interest, lien or claim
of any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership for the assets of each Portfolio will be freely
transferable without the payment of money or value other than for custody
or administration; (c) adequate records will be maintained identifying the
assets as belonging to each applicable Portfolio; (d) officers of or
auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public
accountants for the Fund, will be given access to the books and records of
the foreign banking institution relating to its actions under its agreement
with the Custodian; and (e) assets of the Portfolios held by the foreign
sub-custodian will be subject only to the instructions of the Custodian or
its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
---------------------------------------------
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of
13
<PAGE>
such foreign banking institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
--------------------
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notifications of
any transfers of securities to or from each custodial account maintained by
a foreign banking institution for the Custodian on behalf of each
applicable Portfolio indicating, as to securities acquired for a Portfolio,
the identity of the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise provided
---------------------------------------
in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and 2.7
of this Contract shall apply, mutatis mutandis to the foreign securities of
------- --------
the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the account
of each applicable Portfolio may be effected in accordance with the
customary established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
-----------------------------------
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking
14
<PAGE>
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
----------------------
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
--------------------------
cash or securities for any purpose for the benefit of a Portfolio including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's
assets to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
---------------------------
Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian
15
<PAGE>
will promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign sub-
custodian or any material loss of the assets of the Fund or in the case of
any foreign sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign sub-
custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
----------------------
Contract, the provisions hereof shall not apply where the custody of the
Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a sub-
custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction
of the Custodian, State Street London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for any
-------
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
----------------------------------------------------------------------
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received
16
<PAGE>
for Shares of that Portfolio issued or sold from time to time by the Fund. The
Custodian will provide timely notification to the Fund on behalf of each such
Portfolio and the Transfer Agent of any receipt by it of payments for Shares of
such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian shall honor checks
drawn on the Custodian by a holder of Shares, which checks have been furnished
by the Fund to the holder of Shares, when presented to the Custodian in
accordance with such procedures and controls as are mutually agreed upon from
time to time between the Fund and the Custodian.
5. Proper Instructions
-------------------
Proper Instructions as used throughout this Contract means a writing signed
or initialled by one or more person or persons as the Board of Trustees shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of procedures approved by the Board of
Trustees, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three - party agreement which requires a segregated asset account in
accordance with Section 2.12.
17
<PAGE>
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
--------
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income
------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Fund to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio or, if directed in writing to do so
by the Fund on behalf of the Portfolio, shall itself keep such books of account
and/or compute such net asset value per share. If so directed, the Custodian
shall also calculate daily the net income of the Portfolio as described in the
Fund's currently effective prospectus related to such Portfolio and shall advise
the Fund and
18
<PAGE>
the Transfer Agent daily of the total amounts of such net income and, if
instructed in writing by an officer of the Fund to do so, shall advise the
Transfer Agent periodically of the division of such net income among its various
components. The calculations of the net asset value per share and the daily
income of each Portfolio shall be made at the time or times described from time
to time in the Fund's currently effective prospectus related to such Portfolio.
9. Records
-------
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to
19
<PAGE>
provide reasonable assurance that any material inadequacies would be disclosed
by such examination, and, if there are no such inadequacies, the reports shall
so state.
12. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel (who may be counsel for the Fund)
on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruuption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similiar events or acts; (ii) errors by the Fund or the Investment Advisor
in their instructions to the Custodian provided such instructions have been in
accordance with this Contract; (iii) the insolvency of or acts or omissions by a
Securities System; (iv) any delay or failure of any broker, agent or
intermediary, central bank or other commercially prevalent
20
<PAGE>
payment or clearing system to deliver to the Custodian's sub-custodian or agent
securities purchased or in the remittance or payment made in connection with
securities sold; (v) any delay or failure of any company, corporation, or other
body in charge or registering or transferring securities in the name of the
Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or
agents or any consequential losses arising out of such delay or failure to
transfer such securities including non-receipt of bonus, dividends and rights
and other accretions or benefits; (vi) delays or inability to perform its duties
due to any disorder in market infrastructure with respect to any particular
security or Securities System; and (vii) any provision of any present or future
law or regulation or order of the United States of America, or any state
thereof, or any other country, or political subdivision thereof or of any court
of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to sub-
custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) for
the benefit of a Portfolio including the purchase or sale of foreign exchange or
of contracts for foreign exchange or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time held
for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's assets to
the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
21
<PAGE>
14. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
--------
Custodian shall not with respect to a Portfolio act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees of the Fund has approved the
initial use of a particular Securities System by such Portfolio, as required by
Rule 17f-4 under the Investment Company Act of 1940, as amended and that the
Custodian shall not with respect to a Portfolio act under Section 2.11 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees has approved the initial use of
the Direct Paper System by such Portfolio ; provided further, however, that the
-------- -------
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
-------------------
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy
22
<PAGE>
of a vote of the Board of Trustees of the Fund, deliver at the office of the
Custodian and transfer such securities, funds and other properties in accordance
with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
--------
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Declaration of Trust of the Fund. No
interpretive or additional provisions made as provided in the preceding sentence
shall be deemed to be an amendment of this Contract.
23
<PAGE>
17. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to PACE Money Market Investments, PACE Government Securities Fixed
Income Investments, PACE Intermediate Fixed Income Investments, PACE Strategic
Fixed Income Investments, PACE Municipal Fixed Income Investments, PACE Global
Fixed Income Investments, PACE Large Company Value Equity Investments, PACE
Large Company Growth Equity Investments, PACE Small\Medium Company Value Equity
Investments, PACE Small\Medium Company Growth Equity Investments, PACE
International Equity Investments and PACE International Emerging Markets Equity
Investments with respect to which it desires to have the Custodian render
services as custodian under the terms hereof, it shall so notify the Custodian
in writing, and if the Custodian agrees in writing to provide such services,
such series of Shares shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
20. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than
24
<PAGE>
corporate communications. Please indicate below whether the Fund consents or
objects by checking one of the alternatives below.
YES / / The Custodian is authorized to release the Fund's name, address,
and share positions.
NO / / The Custodian is not authorized to release the Fund's name,
address, and share positions.
25
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of ,
199 .
ATTEST
By
- ----------------------------- --------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
By
- ----------------------------- --------------------------------
Executive Vice President
26
<PAGE>
Schedule A
----------
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of Managed Accounts
Services Portfolio Trust for use as sub-custodians for the Fund's securities and
other assets:
(Insert banks and securities depositories)
Certified:
- -----------------------------
Fund's Authorized Officer
Date: _______________________
27
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of
Additional Information and to the incorporation by reference of our
report dated September 21, 1995, in this Registration Statement (Form
N-2 No. 33-64808) of Global Small Cap Fund Inc.
/s/ ERNST & YOUNG LLP
----------------------------
Ernst & Young LLP
New York, New York
September 27, 1995
