<PAGE>
As filed with the Securities and Exchange Commission on October 10, 1996
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. 4 /X/
and
Registration Statement Under the Investment Company Act of 1940 /X/
Amendment No. 7 /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.
MARK T. UYEDA, ESQ. MITCHELL HUTCHINS ASSET
KIRKPATRICK & LOCKHART LLP MANAGEMENT INC.
1800 Massachusetts Avenue, 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.
================================================================================
<PAGE>
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
Securities........................................ Dividends and Other Distributions; Dividend
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
Additional Information............................ Further Information
<CAPTION>
Part B
Item Number Caption Statement of Additional Information
----------- ------- -----------------------------------
<S> <C> <C>
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 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'. NO ADDITIONAL
SHARES OF COMMON STOCK WILL BE ISSUED IN CONNECTION WITH THIS OFFERING. 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
November , 1996 was $ . 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 29, 1996 has been filed with the Securities
and Exchange Commission and is incorporated by reference in its entirety into
this Prospectus. A Table of Contents for the SAI is set forth as the last
section of this Prospectus. A copy of the SAI can be obtained without charge by
writing to the Fund 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 29, 1996.
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price).... None (1)
Dividend Reinvestment Plan Fees................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON STOCK)(2)
Investment Advisory and Administration Fees....... 1.00%
Other Expenses.................................... 0.76%
----
Total Annual Expenses........................ 1.76%
----
----
</TABLE>
- ------------------
(1) Prices for shares of Common Stock traded in the OTC secondary market will
reflect ordinary dealer mark-ups.
(2) See 'Management of the Fund' for additional information. The investment
advisory and administration fees payable to Mitchell Hutchins are greater
than the advisory and administration fees paid by most funds. 'Other
Expenses' have been estimated based upon expenses actually incurred for
fiscal year ended July 31, 1996.
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>
$18 $55 $ 92 $ 198
</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.............. No additional shares of the Fund's common stock
('Common Stock') will be issued in connection with
this offering. Shares of 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 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 that 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, that 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 obligations issued or
guaranteed by 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
investment portfolio, including 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 October
31, 1996, total assets under Mitchell Hutchins'
management were approximately $ billion. As of
that date, Mitchell Hutchins served as investment
adviser or sub-adviser to 31 registered investment
companies with 65 separate portfolios having
aggregate assets of approximately $ billion. Of
that amount, approximately $ 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
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
of Common Stock in connection with the Plan. See
'Dividends and Other Distributions; Dividend
Reinvestment Plan.'
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.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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
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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
regarding the price to be paid and facilitating
the continuity of the Fund's management,
investment objective and policies.
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, including
the Fund, frequently trade at a discount to their
net asset values. Whether investors will realize
gains or losses upon the sale of shares of the
Common Stock will not depend directly upon changes
in the Fund's net asset value, but will depend
upon whether the market price of the Common Stock
at the time of sale is above or below the original
purchase price for the shares. This market risk is
separate and distinct from the risk that the
Fund's net asset value may decrease. 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 'Trading
History,' '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 one 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, 1996, 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 YEARS ENDED JULY 31, FOR THE PERIOD
-------------------------------- OCTOBER 15, 1993+
1996 1995 TO JULY 31, 1994
-------------- -------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of
period............................. $ 11.61 $ 13.28 $ 14.18
-------------- -------------- -----------------
Net investment income (loss)....... (0.01) 0.08 (0.05)
Net realized and unrealized gains
(losses) from investment
transactions....................... 1.04 (0.95) (0.80)
-------------- -------------- -----------------
Total gain (loss) from investment
operations......................... 1.03 (0.87) (0.85)
-------------- -------------- -----------------
Distributions from net realized
gains.............................. -- (0.80) --
-------------- -------------- -----------------
Offering costs charged to additional
paid-in capital.................... -- -- (0.05)
-------------- -------------- -----------------
Net asset value, end of period....... $ 12.64 $ 11.61 $ 13.28
-------------- -------------- -----------------
-------------- -------------- -----------------
Market value, end of period.......... $ 10.38 $ 9.25 $ 12.13
-------------- -------------- -----------------
-------------- -------------- -----------------
Total investment return (1).......... 12.22% (17.64)% (14.46)%
-------------- -------------- -----------------
-------------- -------------- -----------------
Ratios/Supplemental Data:
Net assets, end of period
(000's)............................ $ 48,068 $ 44,137 $50,474
Expenses to average net assets....... 1.76% 1.69% 1.79%*
Net investment income (loss) to
average net assets................. (0.10)% 0.62% (0.46)%*
Portfolio turnover................... 64% 187% 71%
</TABLE>
- ------------------
+ Commencement of operations.
* Annualized
(1) Total investment return is calculated assuming a purchase of common stock at
market value on the first day of each period reported, reinvestment of all
dividends and distributions, if any, in accordance with the Dividend
Reinvestment Plan, and a sale at market value on the last day of each period
reported. Total investment return does not reflect sales charges or
brokerage commissions. Total investment returns for periods of less than one
year have not been annualized.
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. No additional shares
of Common Stock will be issued in connection with this offering. 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 fiscal quarter
within the two most recent fiscal years and each fiscal quarter since the
beginning of the current fiscal year: (a) the per share high and low sales
prices as reported by the 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 November , 1996, the closing
price per share of Common Stock was $ , the Fund's net asset value per share
was $ and the discount to net asset value was ( )%.
<TABLE>
<CAPTION>
(DISCOUNT) OR
PREMIUM
NET ASSET TO NET ASSET
MARKET PRICE VALUE VALUE
-------------- -------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
10/31/94..... $12.87 $11.63 $14.67 $13.98 (12.24)% (16.85)%
1/31/95...... 11.63 9.63 14.04 11.52 (17.20) (16.45)
4/30/95...... 9.63 8.25 11.48 10.57 (16.16) (21.95)
7/31/95...... 9.63 8.50 11.56 10.89 (16.74) (21.95)
10/31/95..... 9.38 8.50 11.61 10.88 (19.25) (21.88)
1/31/96...... 10.38 8.38 11.70 10.85 (11.28) (22.81)
4/30/96...... 10.63 10.00 12.92 12.60 (17.76) (20.63)
7/31/96...... 12.25 10.13 13.37 13.02 (8.38) (22.24)
10/31/96.....
</TABLE>
- ------------------
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.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital appreciation. The Fund
normally invests primarily in equity securities of small cap companies located
throughout the world, including 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 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
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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.
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
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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
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
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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 or liquid
securities, 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 portfolio
securities with a value of up to 33 1/3% of its total assets taken at market
value (determined at the time of the transaction) to qualified broker-dealers
or institutional investors that Mitchell Hutchins deems qualified, but only
when the borrower maintains collateral with the Fund's custodian bank, marked
to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral
is limited to cash, U.S. government securities and irrevocable letters of
credit that meet certain guidelines established by Mitchell Hutchins. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash 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
Mitchell Hutchins 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 (100% or greater) 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 years ended July 31, 1996 and
July 31, 1995, the Fund's portfolio turnover rate was 64% and 187% respectively.
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
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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 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
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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 Ratings
Service, a division of the McGraw Hill Companies, Inc. ('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 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
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<PAGE>
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,
including the Fund, frequently trade at a discount to their net asset values.
See 'Trading History.' Whether investors will realize gains or losses upon the
sale of Common Stock will not depend directly upon changes in the Fund's net
asset value, but will depend upon whether the market price of the Common Stock
at the time of sale is above or below the original purchase price for the
shares. This market risk is separate and distinct from the risk that the Fund's
net asset value may decrease. The market price of shares 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.
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
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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 October 31, 1996, total
assets under Mitchell Hutchins' management were approximately $ billion. As
of that date, Mitchell Hutchins served as investment adviser or sub-adviser to
31 registered investment companies with 65 separate portfolios having aggregate
assets of approximately $ billion. Of that amount, approximately $ 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, Stamford, Connecticut 06905 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 in excess of $ billion as of October 31, 1996.
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 years ended July 31, 1996 and July 31, 1995 and
for the period October 15, 1993 (commencement of operations) to July 31, 1994,
the Fund's total expenses, stated as a percentage of net assets, were 1.76%,
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.
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) 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. 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 is
normally 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 , 1996:
<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.
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 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.
21
<PAGE>
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. There can be no
assurance that the board will conclude that such a conversion is in the best
interests of the Fund or its shareholders. As an open-end investment company,
the Fund may reserve the right to honor any request for redemption by making
payment in whole or in part in securities chosen by the Fund and valued in the
same way as they would be valued for purposes of computing the Fund's net asset
value. If payment is made in securities, a 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.
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
22
<PAGE>
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................................. 14
Control Persons and Principal Holders of Securities.... 20
Investment Advisory Arrangements....................... 20
Portfolio Transactions................................. 21
Valuation of Common Stock.............................. 23
Taxation............................................... 24
Additional Information................................. 26
Financial Statements................................... 27
Appendix A............................................. 28
</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............................ 13
Management of the Fund............................................. 16
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
------------------------
NOVEMBER 29, 1996
================================================================================
(COPYRIGHT)1996 PaineWebber Incorporated
<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 29, 1996. 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 29, 1996.
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, a division of the McGraw-Hill Companies, Inc. ('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 or upon demand and at a 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 OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed without the affirmative vote of the lesser of (a) more than
50% of the outstanding shares of the Fund, or (b) 67% or more of such shares
present at a stockholders' meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, later
changes 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.
The Fund may not:
(1) purchase securities of any one issuer if, as a result, more than
5% of the Fund's total assets would be invested in securities of that
issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Fund's total
assets may be invested without regard to this limitation, and except that
this limitation does not apply to securities issued or guaranteed by the
U.S. government, its agencies and instrumentalities or to securities issued
by other investment companies.
(2) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities.
(3) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Fund's total assets
(including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance
or borrowing, except that the Fund may borrow up to an additional 5% of its
total assets (not including the amount borrowed) for temporary or emergency
purposes.
(4) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt securities or
instruments, or participations or other interests therein and investments
in government obligations, commercial paper, certificates of deposit,
bankers' acceptances or similar instruments will not be considered the
making of a loan.
(5) engage in the business of underwriting securities of other
issuers, except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with its
disposition of portfolio securities.
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(6) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation,
and except that the Fund may exercise rights under agreements relating to
such securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real
estate can be liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the Fund may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment limitations are not
fundamental and may be changed by the Fund's board of directors without
shareholder approval.
The Fund will not:
(1) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the Fund
may make margin deposits in connection with its use of financial options
and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.
(2) engage in short sales of securities or maintain a short position,
except thtat the Fund may (a) sell short 'against the box' and (b) maintain
short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(3) invest in oil, gas or mineral exploration or development programs
or leases, except that investments in securities of issuers that invest in
such programs or leases and investments in asset-backed securities
supported by receivables generated from such programs or leases are not
subject to this prohibition.
HEDGING STRATEGIES
HEDGING INSTRUMENTS. 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 Fund may use the Hedging Instruments described below:
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
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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.
GENERAL DESCRIPTION OF HEDGING STRATEGIES. 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.
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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 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
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positions in such Hedging Instruments, it might be required to continue to
maintain such assets or accounts to make such payments until the position
expired or matured. These requirements might impair the Fund's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a
position in a Hedging Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of the other party to the transaction
('contra party') to enter into a transaction closing out the position.
Therefore, there is no assurance that any hedging position can be closed
out at a time and price that is favorable to the Fund.
COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments,
other than purchased options, expose the Fund to an obligation to another party.
The Fund will not enter into any such transactions unless it owns either (1) an
offsetting ('covered') position in securities, currencies or other options or
futures contracts or (2) cash or liquid securities, with a value sufficient at
all times to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding cover
for hedging transactions and will, if the guidelines so require, set aside cash
or liquid securities in a segregated account with its custodian in the
prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet current obligations.
OPTIONS. The Fund may purchase put and call options, and write (sell)
covered 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
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securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the contra party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the contra party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
Generally, the OTC debt and foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Fund's ability to establish the close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the contra
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 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
12
<PAGE>
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.
13
<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 AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Margo N. Alexander**; 49 Director and Mrs. Alexander is president,
President chief executive officer and
a director of Mitchell
Hutchins (since January
1995) and also an executive
vice president and a
director of PaineWebber.
Mrs. Alexander is president
and a director or trustee of
30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 61 Director Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and
principal occupation since
March 1995). Mr. Armstrong
is also a director of Hi Lo
Automotive, Inc. He was
chairman of the board, chief
executive officer and
co-owner of Adirondack
Beverages (producer and
distributor of soft drinks
and sparkling/still waters)
(October 1993-March 1995).
Mr. Armstrong was a partner
of the New England
Consulting Group (management
consulting firm) (December
1992-September 1993). He was
managing director of LVMH
U.S. Corporation (U.S.
subsidiary of the French
luxury goods conglomerate,
Luis Vuitton Moet Hennessey
Corporation) (1987-1991) and
chairman of its wine and
spirits subsidiary,
Schieffelin & Somerset
Company (1987-1991). Mr.
Armstrong is a director or
trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
E. Garrett Bewkes, Jr.; 70** Director and Mr. Bewkes is a director of
Chairman of Paine Webber Group Inc. ('PW
the Board of Group') (holding company of
Directors PaineWebber and Mitchell
Hutchins). Prior to December
1995, he was 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 a director of
Interstate Bakeries
Corporation and NaPro
BioTherapeutics, Inc. Mr.
Bewkes is a director or
trustee of 30 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Richard R. Burt; 49 Director Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity
Washington, D.C. 20036 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 a
director or trustee of 29
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Mary C. Farrell**; 46 Director Ms. Farrell is a managing
director, senior investment
strategist and member of the
Investment Policy Committee
of PaineWebber. Ms. Farrell
joined PaineWebber in 1982.
She is a member of the
Financial Women's
Association and Women's
Economic Roundtable, and is
employed as a regular
panelist on Wall $treet Week
with Louis Rukeyser. She
also serves on the Board of
Overseers of New York
University's Stern School of
Business. Ms. Farrell is a
director or trustee of 29
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Meyer Feldberg; 54 Director Dean Feldberg is Dean and
Columbia University Professor of Management of
101 Uris Hall the Graduate School of
New York, New York 10027 Business, Columbia
University. Prior to 1989,
he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of AMSCO
International Inc.,
Federated Department Stores,
Inc. and New World
Communications Group
Incorporated. Dean Feldberg
is a director or trustee of
29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
George W. Gowen; 67 Director Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, New York 10017 Bartholow & Miller. Prior to
May 1994, he was a partner
in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a
director of Columbia Real
Estate Investments, Inc. Mr.
Gowen is a director or
trustee of 29 investment
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Frederic V. Malek; 59 Director Mr. Malek is chairman of
1455 Pennsylvania Ave., N.W. Thayer Capital Partners
Suite 350 (investment bank) and a
Washington, D.C. 20004 co-chairman and director of
CB Commercial Group Inc.
(real estate). From January
1992 to November 1992, he
was campaign manager of
Bush-Quayle '92. From 1990
to 1992, he was vice
chairman and, from 1989 to
1990, he was president of
Northwest Airlines Inc., NWA
Inc. (holding company of
Northwest Airlines Inc.)
and Wings Holdings Inc.
(holding company of NWA
Inc.). Prior to 1989, he was
employed by the Marriott
Corporation (hotels,
restaurants, airline
catering and contract
feeding), where he most
recently was an executive
vice president and presi-
dent of Marriott Hotels and
Resorts. Mr. Malek is also a
director of American
Management Systems, Inc.
(management consulting and
computer-related services),
Automatic Data Processing,
Inc., Avis, Inc. (passenger
car rental), FPL Group, Inc.
(electric services),
National Education
Corporation and Northwest
Airlines Inc. Mr. Malek is a
director or trustee of 29
investment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Carl W. Schafer; 60 Director Mr. Schafer is president of
P.O. Box 1164 the Atlantic Foundation
Princeton, NJ 08542 (charitable foundation
supporting mainly
oceanographic exploration
and research). He also is a
director of Roadway Express,
Inc. (trucking), The
Guardian Group of Mutual
Funds, Evans Systems, Inc.
(a motor fuels, convenience
store and diversified
company), Hidden Lake Gold
Mines Ltd., Electronic
Clearing House, Inc.,
(financial transactions
processing), Wainoco Oil
Corporation and Nutraceutix,
Inc. (biotechnology). Prior
to January 1993, Mr. Schafer
was chairman of the
Investment Advisory
Committee of the Howard
Hughes Medical Institute.
Mr. Schafer is a director or
trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
John R. Torell III; 57 Director Mr. Torell is chairman of
767 Fifth Avenue Torell Management, Inc.
Suite 4605 (financial advisory firm),
New York, NY 10153 chairman of Telesphere
Corporation (electronic
provider of financial
information) and a partner
of Zilkha and Company
(merchant banking and
private investment company).
He is the former chairman
and chief executive officer
of Fortune Bancorp
(1990-1991 and 1990-1994,
respectively), the former
chairman, president and
chief executive officer of
CalFed, Inc. (savings
association) (1988 to 1989)
and former president of
Manufacturers Hanover Corp.
(bank) (prior to 1988). Mr.
Torell is a director of
American Home Products
Corp., New Colt Inc.
(armament manufacturer) and
Volt Information Sciences
Inc. Mr. Torell is a
director or trustee of 29
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Teresa M. Boyle; 38 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 30
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
C. William Maher; 35 Vice President Mr. Maher is a first vice
and president and a senior
Assistant manager of the mutual fund
Treasurer finance division of Mitchell
Hutchins. Mr. Maher is a
vice president and assistant
treasurer of 30 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Ann E. Moran; 39 Vice President Ms. Moran is a vice president
and of Mitchell Hutchins. Ms.
Assistant Moran is a vice president
Treasurer and assistant treasurer of
30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a senior vice
and president and deputy general
Secretary counsel of Mitchell
Hutchins. Ms. O'Donnell is a
vice president and secretary
of 29 investment companies
for which Mitchell
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Hutchins or PaineWebber
serves as investment
adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing
director and general counsel
of Mitchell Hutchins. Prior
to May 1994, she was a
partner in the law firm of
Arnold & Porter. Ms.
Schonfeld is a vice
president of 30 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice
and president and a senior
Assistant manager of the mutual fund
Treasurer finance division of Mitchell
Hutchins. From August 1992
to August 1994, he was a
vice president of BlackRock
Financial Management Inc.
Prior to August 1992, he was
an audit manager with Ernst
& Young LLP. Mr. Schubert is
a vice president and
assistant treasurer of 30
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Julian F. Sluyters; 36 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 a vice president
and treasurer of 30
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing
director and chief
investment officer--U.S.
equity investments of
Mitchell Hutchins. Prior to
March 1995, he was a vice
president and directed the
U.S. funds management and
equity research areas of
Chase Manhattan Private
Bank. Mr. Tincher is a vice
president of 14 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Gregory K. Todd; 39 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 a vice president and
assistant secretary of 30
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Keith A. Weller; 35 Vice President Mr. Weller is a first vice
and president and associate
Assistant general counsel of Mitchell
Secretary Hutchins. Prior to May 1995,
he was an attorney in
private practice. Mr. Weller
is a vice president and
assistant secretary of 29
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.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Fund as defined in the 1940 Act by virtue of their positions with PW Group,
PaineWebber and/or Mitchell Hutchins.
The Fund pays directors who are not 'interested persons' of the Fund $1,000
annually and $150 for each board meeting and each meeting of a board committee
(other than committee meetings held on the same day as a board meeting). Messrs.
Feldberg and Torell serve as chairmen of the audit and contract review
committees of individual funds within the PaineWebber fund complex and receive
additional compensation aggregating $15,000 annually each from the relevant
funds. All directors are reimbursed for any expenses incurred in attending
meetings. Because PaineWebber and Mitchell Hutchins perform substantially all
the services necessary for the operation of the Fund, the Fund requires no
employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
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 current directors who held office with the Fund or with other
PaineWebber funds during the Fund's last fiscal year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
FUND AND THE
AGGREGATE FUND
COMPENSATION COMPLEX PAID
FROM TO
NAME OF PERSON, POSITION THE FUND* DIRECTORS**
- ------------------------------ ------------ -------------
<S> <C> <C>
Richard Q. Armstrong,
Director***................. $ 526 $ 9,000
Richard R. Burt, Director..... 2,648 7,750
Meyer Feldberg, Director***... 232 106,375
George W. Gowen,
Director***................. 232 99,750
Frederic V. Malek,
Director***................. 232 99,750
Carl W. Schafer,
Director***................. 232 118,175
John R. Torell III,
Director.................... 2,398 28,125
</TABLE>
- ------------------
Only independent members of the board of directors are compensated by the Fund
and directors who are 'interested persons,' as defined by the 1940 Act, do not
receive compensation.
* Represents fees paid to each director during the fiscal year ended July 31,
1996.
** Represents total compensation paid to each director during the calendar year
ended December 31, 1995; no fund within the fund complex has a pension or
retirement plan.
*** Elected as a director at a Shareholder meeting held on April 11, 1996.
19
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of November , 1996, 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, 1996, 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'), on June 23, 1993
and by its initial stockholder on September 27, 1993. Unless sooner terminated,
the Advisory Contract will continue automatically for successive annual periods,
provided that such continuance is specifically
20
<PAGE>
approved at least annually: (1) by a majority vote of the Independent Directors
cast in person at a meeting called for the purpose of voting on such approval;
and (2) by the board of directors or by vote of a majority of the outstanding
voting securities of the Fund.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in
the performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. The Advisory Contract is terminable by
vote of the board of directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to Mitchell Hutchins. The Advisory Contract may also be
terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The
Advisory Contract terminates automatically upon its assignment.
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. 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 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 years ended July 31, 1996 and 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 $456,664, $469,312 and $443,907,
respectively, in investment advisory and administration fees. Mitchell Hutchins
(not the Fund) paid or accrued to GEIM $228,332 and $76,013, respectively, in
investment advisory fees during the fiscal years ended July 31, 1996 and July
31, 1995.
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber mutual funds and other Mitchell Hutchins'
advisory accounts held by all Mitchell Hutchins' directors, officers and
employees, that establishes procedures for personal investing and restricts
certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber Funds and other Mitchell Hutchins advisory clients. GEIM personnel
may also invest in securities for their own accounts pursuant to a comparable
code of ethics.
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
21
<PAGE>
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 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 years ended July 31, 1996 and 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
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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 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 for 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 years
ended July 31, 1996 and July 31, 1995 and for the period October 15, 1993
(commencement of operations) to July 31, 1994, the Fund paid $304,144, $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 Stock Market, Inc. ('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.
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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 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 received 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 stockholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
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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.
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, the Fund will be subject to federal income tax on a portion of
any 'excess distribution' received on the stock of a PFIC or of any gain on
disposition of that stock (collectively 'PFIC income'), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
stockholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its 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 will be required to
include in income each year its pro rata share of the qualified electing fund's
annual ordinary earnings and net capital gain (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 are not distributed to 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, a closed-end RIC 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' its
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 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
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of each taxable year certain positions in its portfolio, which may cause the
Fund to recognize income without receiving cash with which to make distributions
necessary to satisfy the Distribution Requirement and to avoid imposition of the
Excise Tax. In that event, the Fund might have to liquidate securities to enable
it to make the required distributions, which would cause it to recognize gains
or losses and might affect its ability to satisfy the Short-Short Limitation.
Gains from the disposition of foreign currencies (except certain gains that
may be excluded by future regulations), and gains from options, futures and
forward currency contracts derived by the Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement. 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, forward contracts and foreign currency positions 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
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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
Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Fund,
has passed upon the legality of the shares offered by the Fund's Prospectus.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended July 31,
1996 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.
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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;
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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;
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'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 often 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, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
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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.
31
<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................................. 14
Control Persons and Principal Holders of Securities.... 20
Investment Advisory Arrangements....................... 20
Portfolio Transactions................................. 21
Valuation of Common Stock.............................. 23
Taxation............................................... 24
Additional Information................................. 26
Financial Statements................................... 27
Appendix A............................................. 28
</TABLE>
GLOBAL SMALL CAP FUND INC.
COMMON STOCK
------------------------
STATEMENT OF ADDITIONAL
INFORMATION
------------------------
PAINEWEBBER INCORPORATED
------------------------
NOVEMBER 29, 1996
================================================================================
(COPYRIGHT)1996 PaineWebber Incorporated
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements:
Included in Part A of the Registration Statement:
a. Financial Highlights for each of the two
fiscal years ended July 31, 1996 and for
the period October 15, 1993 (commencement
of operations) to July 31, 1994.
Included in Part B of the Registration Statement
through incorporation by reference from the Annual
Report to the Shareholders, previously filed with
the Securities and Exchange Commission through EDGAR
on September 25, 1996 (File No. 33-64808)
(Accession No. 0000908158-96-000003):
a. Portfolio of Investments as of July 31, 1996
b. Statement of Assets and Liabilities as of July 31,
1996
c. Statement of Operations for the fiscal year ended
July 31, 1996
d. Statement of Changes in Net Assets for each of the
two fiscal years in the period ended July 31, 1996
e. Notes to Financial Statements
f. Financial Highlights
g. Report of Ernst & Young LLP, Independent Auditors,
dated September 11, 1996
2. Exhibits:
a. Articles of Incorporation(1)
b. (i) Bylaws(2)
(ii) Amendment to Bylaws(2)
c. None
d. Inapplicable
e. Dividend Reinvestment Plan(3)
- --------
(1) Incorporated by reference to exhibit 1 to the initial
Registration Statement on Form N-2 filed June 22, 1993 (File
No. 33-64808).
(2) Incorporated by reference to exhibit b to Post-Effective
Amendment No. 3 to the Registration Statement on Form N-2
filed September 29, 1995 (File No. 33-64808).
(3) Incorporated by reference to exhibit 5 to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2
filed September 30, 1993 (File No. 33-64808).
II-1
<PAGE>
f. None
g. (i) Investment Advisory and Administration
Contract(4)
(ii) Form of Sub-Advisory Agreement(5)
h. Underwriting Agreement(6)
i. None
j. Form of Custodian Agreement(7)
k. Transfer Agency Agreement(8)
l. Opinion and Consent of Counsel(9)
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent(10)
q. None
r. Financial Data Schedule (filed herewith)
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 Registrants'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.
- --------
(4) Incorporated by reference to exhibit g to Post-Effective
Amendment No. 2 to the Registration Statement on Form N-2
filed November 23, 1994 (File No. 33-64808).
(5) Incorporated by reference to exhibit g to Post-Effective Amendment
No. 3 to the Registration Statement on Form N-2 filed September 29,
1995 (File No. 33-64808).
(6) The shares offered by the Prospectus will be offered in order
to effect over-the-counter secondary market transactions by
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 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).
(7) Incorporated by reference to exhibit j to Post-Effective
Amendment No. 3 to the Registration Statement on Form N-2
filed September 29, 1995 (File No. 33-64808).
(8) Incorporated by reference to exhibit k to Post-Effective
Amendment No. 2 to the Registration Statement on Form N-2
filed November 23, 1994 (File No. 33-64808).
(9) Incorporated by reference to exhibit 12 to Pre-Effective
Agreement No. 3 to the Registration Statement on Form N-2
filed October 6, 1993 (File No. 33-64808).
(10) Incorporated by reference to exhibit 16 to Pre-Effective
Amendment No. 2 to the Registration Statement filed September
30, 1993 (File No. 33-64808).
II-2
<PAGE>
Item 28. Number of Holders of Securities
Number of Record
Holders as of
Title of Class September 30, 1996
Common Stock, par value
$0.001 per share 99
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, a Delaware corporation, is a registered
investment adviser and is wholly owned by PaineWebber, which in turn
is wholly owned by Paine Webber Group 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 as filed with the SEC (Registration number 801-13219)
and incorporated by reference.
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained at
the office of the Registrant's custodian, State Street Bank and Trust
Company, at One Heritage Drive, North Quincy, Massachusetts 02171,
except that the Registrant'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 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.
(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.
II-3
<PAGE>
(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-4
<PAGE>
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 State of New York, on the 27th day of
September, 1996.
GLOBAL SMALL CAP FUND INC.
By: /s/ Gregory K. Todd
Gregory K. Todd
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Margo N. Alexander President and Director Sept. 27, 1996
- ----------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr Director and Chairman Sept. 27, 1996
- -------------------------- of the Board of Directors
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Director Sept. 27, 1996
- --------------------------
Richard Q. Armstrong *
/s/ Richard Burt Director Sept. 27, 1996
- -----------------------
Richard Burt *
/s/ Mary C. Farrell Director Sept. 27, 1996
- -----------------------
Mary C. Farrell *
/s/ Meyer Feldberg Director Sept. 27, 1996
- -----------------------
Meyer Feldberg *
/s/ George W. Gowen Director Sept. 27, 1996
- -----------------------
George W. Gowen *
/s/ Frederic V. Malek Director Sept. 27, 1996
- -----------------------
Frederic V. Malek *
/s/ Carl W. Schafer Director Sept. 27, 1996
- -----------------------
Carl W. Schafer *
/s/ John R. Torell III Director Sept. 27, 1996
- -----------------------
John R. Torell III *
/s/ Julian F. Sluyters Vice President and Treasurer (Chief Sept. 27, 1996
- ----------------------- Financial and Accounting Officer)
Julian F. Sluyters
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Robert A. Wittie pursuant to power of
attorney dated May 21, 1996 and incorporated by reference
from Post-Effective Amendment No. 25 to the Registration
Statement of PaineWebber RMA Tax-Free Fund, SEC File No.
2-78310, filed June 27, 1996.
<PAGE>
GLOBAL SMALL CAP FUND INC.
EXHIBIT INDEX
Exhibit Document Description
a. Articles of Incorporation [previously filed as Exhibit 1 to the
initial Registration Statement on Form N-2, filed June 22, 1993
(File No. 33-64808)].
b. (i) Bylaws [previously filed as Exhibit b to Post-Effective
Amendment No. 3 to the Registration Statement on Form
N-2, filed September 29, 1995 (File No. 33-64808)].
(ii) Amendment to the Bylaws [previously filed as Exhibit b
to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-2, filed September 29, 1995
(File No. 33-64808)].
c. None
d. Inapplicable
e. Dividend Reinvestment Plan [previously filed as Exhibit 5 to
Pre-Effective Amendment No. 2 to the 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
Amendment No. 2 to the Registration Statement on Form
N-2, filed November 23, 1994 (File No. 33-64808)].
(ii) Form of Sub-Advisory Agreement [previously filed as
Exhibit g to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-2, filed September 29,
1995 (File No. 33-64808)].
h.
(i) Underwriting Agreement [previously filed as Exhibit
h.(a) to Post-Effective Agreement No. 2 to the
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
Registration Statement, filed September 30, 1993
(File No. 33-64808)]
i. None
j. Form of Custodian Agreement [previously filed as Exhibit j
to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-2, filed September 29, 1995
(File No. 33-64808)].
k. Transfer Agency Agreement [previously filed as Exhibit k
to Post-Effective Agreement No. 2 to the 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
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 Registration
Statement, filed September 30, 1993 (File No.
33-64808)].
q. None
r. Financial Data Schedule [filed herewith]
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 11, 1996, in this Registration Statement (Form
N-2 No. 33-64808) of Global Small Cap Fund Inc.
ERNST & YOUNG LLP
New York, New York
October 8, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908158
<NAME> GLOBAL SMALL CAP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JUL-31-1995
<INVESTMENTS-AT-COST> 43,146
<INVESTMENTS-AT-VALUE> 44,531
<RECEIVABLES> 191
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 126
<TOTAL-ASSETS> 44,852
<PAYABLE-FOR-SECURITIES> 465
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 250
<TOTAL-LIABILITIES> 715
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,859
<SHARES-COMMON-STOCK> 3,802
<SHARES-COMMON-PRIOR> 3,802
<ACCUMULATED-NII-CURRENT> 446
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,667)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,387
<NET-ASSETS> 44,137
<DIVIDEND-INCOME> 741
<INTEREST-INCOME> 341
<OTHER-INCOME> 0
<EXPENSES-NET> 791
<NET-INVESTMENT-INCOME> 291
<REALIZED-GAINS-CURRENT> (10,490)
<APPREC-INCREASE-CURRENT> 6,892
<NET-CHANGE-FROM-OPS> (3,307)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (3,029)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (6,336)
<ACCUMULATED-NII-PRIOR> (737)
<ACCUMULATED-GAINS-PRIOR> 3,011
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 469
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 791
<AVERAGE-NET-ASSETS> 46,931
<PER-SHARE-NAV-BEGIN> 13.28
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (0.95)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.80)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.61
<EXPENSE-RATIO> 1.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
